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Defense Base Act Insurance:Allocating Wartime Contracting Risks Between Government and
Private Industry
Hugh Barrett McClean*
* Major Hugh B. McClean serves in the U.S. Air Force Judge Advocate General’s Corps. The views expressed in this paper are those of the author and do not reflect the official policy or position of the United States Air Force, Department of Defense, or the U.S. Government.
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Table of Contents
I. Contractor Casualties — The Hidden Cost of War............3
A. Introduction.........................................3
B. Contractor Death Toll Exceeds That of U.S. Military in Iraq and Afghanistan.................................8
C. Contractor Veterans Encounter Difficulties After Overseas Employment.................................12
II. Problems With The Current Regulatory Scheme..............21
A. The Longshore and Harbor Workers’ Compensation Act, the Defense Base Act, and the War Hazard Compensation Act....................................................21
B. DBA Insurance Concerns: Rising Costs and Denial of Claims..............................................29
III. Developing a New Acquisition Strategy....................51
A. Policy Changes Could Alleviate Existing Problems. . . .51
B. Single-Provider Insurance Versus Open-Market Insurance: A 40 Year Debate....................................56
IV. Acquisition Strategies...................................64
A. Maintaining the Current Open-Market System..........64
B. Single-Provider System: An Impracticable Alternative 67
C. Multiple-Provider System: Taking Control of DBA Insurance...........................................70
1. Privity of Contract............................71
2. Potential for Cost Savings.....................74
3. Competition....................................76
4. Additional Protections for Contractors.........77
5. Outcomes Versus Costs..........................81
D. Maintaining the Status Quo..........................84
E. Government Self-Insurance: An Ideal Alternative.....89
V. Conclusion: The Way Ahead................................98
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I. Contractor Casualties — The Hidden Cost of War
A. Introduction
The killing of Osama Bin Laden has provided leverage to the
United States in the war against Al Qaeda, and some members of
Congress are now calling for a troop withdrawal and an end to
military operations in Afghanistan.1 However, the Iraq invasion
offers sound evidence that even if such an order was given, the
U.S. military, along with thousands of civilian contractors,
would remain in Afghanistan for some time.2 Long after the
toppling of Saddam Hussein’s regime in 2003, U.S. troops and
civilian contractors remained in Iraq to begin the massive
undertaking of rebuilding infrastructure decimated by years of
war.3 Now, eleven years later, the rebuilding of Iraq
continues.4 Similar rebuilding efforts in Afghanistan are
already underway and will likely continue well into the future.5
Regardless of when U.S. soldiers withdraw from the Middle
East, senior military officials have pledged their support to
these veterans.6 Many injured soldiers have been kept alive by 1 See Siobhan Hughes, 27 Senators Call For Sizable Troop Withdrawal From Afghanistan, Wall St. J., June 15, 2011, http://online.wsj.com/article/BT-CO-20110615-712044.html.2 Need citation3 Need citation4 Need citation5 Need citation6 Need citation
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improvements in Kevlar vests and other lifesaving equipment, but
are returning to the United States with permanent disabling
injuries.7 Other returning soldiers are suffering from mental
health disorders and pose a higher suicide risk, a problem that
has plagued the military during times of lengthy and repeated
troop deployments.8 Fortunately, universal government health
care for military members allows wounded warriors to be treated
by world-class physicians and health care practitioners.9
However, there is a much lesser known contingent of men and women
working overseas in support of their military brethren who are
not as celebrated or as fortunate. They are America’s contractor
veterans, and they, too, have suffered injuries of war.
Deployed contractors are returning home in record numbers
with many of the same injuries and health issues facing soldiers.
Working alongside the military, often in dangerous security
roles, contractor veterans are showing signs of post-traumatic
stress and other mental health disorders commonly found only in
soldiers exposed to combat.10 While a number of government
agencies are tasked with treating active duty and veterans of
U.S. wars, those same support networks are largely absent for
7 Need citation8 Need citation9 Need citation10 Need citation See James Risen, After Iraq, Contractors Face Mental Health Issues, N.Y. TIMES , Jul. 4, 2007, http://www.nytimes.com/2007/07/04/health/psychology/04cnd-contractors.html.
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contractors.11 Regrettably, this issue has largely been ignored,
even as contractors and military members increasingly share the
same battle space. This ignorance is partly due to an insolent
group of Americans who believe contractors are essentially
expendable.12 They believe that the greatest benefit contractors
provide to the government is the expiration of their contract.13
However, injured contractors have recently been able to voice
their concerns to members of Congress, and government officials
are now beginning to debate the potentially broad and long-term
consequences of discounting these contractor veterans.14
The issue parallels the national healthcare debate. The
cost of treating the uninsured or underinsured in emergency rooms
has caused healthcare costs to skyrocket, but solutions for
increased coverage are costly and politically contentious.15
Healthy Americans are arguably more productive and less
11 Need citationId.12 Need citation Aaron Walter, “Do Americans View Contractors in Iraq as “Expendable Profiteers?” THE DEFENSE ACT BLOG ( Mar. 7, 2008), http://defensebaseactblog.com/2008/03/07/do-americans-view-contractors-in-iraq-as-expendable-profiteers/.13 Need citationId.14 See After Injury, the Battle Begins: Evaluating Workers’ Compensation for Civilian Contractors in War Zones: Hearing Before the H. Comm. on Oversight and Gov’t Reform, 111th Cong. (2009), available at http://www.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_house_hearings&docid=f:65546.pdf http://www.gpo.gov/fdsys/pkg/CHRG-111hhrg65546/pdf/CHRG-111hhrg65546.pdf [hereinafter House Hearing on Defense Base Act].15 See generally Patient Protection and Affordable Care Act, Pub. L. 111-148, 124 Stat. 119 (codified as amended in scattered sections of 42 U.S.C.).
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burdensome on healthcare and the economy, but opponents of
universal health care argue that the government cannot afford
health care for all Americans.16 The debate touches on the
fundamental question of whether the government has some kind of
moral obligation to care for those who cannot care for
themselves. One might expect less of a debate on the issue of
whether the government has an obligation to contractor veterans
returning from war, as these Americans certainly draw more
sympathy from politicians. However, much like the national
healthcare debate, Congress has been steadfastly focused on the
rising cost of the insurance that contractors use to protect
their employees.17
Rather than limiting reform efforts to fiscal matters, this
article calls upon Congress to capitalize on the opportunity to
correct substantive issues plaguing the Defense Base Act (DBA)18
insurance system. Congress recently passed legislation requiring
the Secretary of Defense to adopt a new acquisition strategy for
insurance required by the DBA.19 While cost should be a
consideration of any new strategy for securing DBA insurance,
16 Need citationJoe Messerli,”Should the Government Provide Free Universal Healthcare to all Americans?” BALANCEDPOLITICS, http://www.balancedpolitics.org/universal_health_care.htm.17 Need citation See House Hearing on Defense Base Act, supra note 14.18 Defense Base Act, 42 U.S.C. §§§ 1651-1654 (2006).19 See Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, Pub. L. No. 110-417 §843, 122 Stat. 4540 (2008).42 U.S.C. § 1655 (2008).
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Congress must consider salient non-cost related benefits when
weighing the merits of various strategies.20 Injured contractors
returning from Iraq and Afghanistan are being denied
reimbursement for medical treatment by their DBA insurance
carriers.21 The problem is occurring with even more frequency
when claims are filed by contractors who suffer from mental
illness related to combat stress.22 Members of Congress have a
duty and an obligation to support contractor veterans and their
families, and they must fulfill that obligation when they choose
a new DBA acquisition strategy.
This article is divided into four parts. Part One describes
the problems encountered by injured contractors as they return
from war. Part Two discusses how the regulatory scheme for
insuring contractors contributes to the problems experienced by
contractors. Part Three offers practical suggestions for
Congress and the Department of Defense (DoD) as they prepare to
adopt a new DBA acquisition strategy. Lastly, Part Four asserts
that the current open-market insurance strategy is inadequate and
argues that Congress should implement a multiple provider system
for DBA insurance. In the short-term, a multiple-provider
strategy best addresses DBA insurance cost and claims processing
concerns, and can be implemented swiftly and without extensive
20 Need citation21 Need citationHouse Hearing on Defense Base Act, supra note 14.22 Need citation
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changes to the law. However, Congress should begin taking steps
to implement government self-insurance, which offers even greater
savings and benefits for injured contractors.
B. Contractor Death Toll Exceeds That of U.S. Military in Iraq and Afghanistan
While the efforts of the men and women in uniform are often
publicly lauded, contractor contributions are frequently
overlooked. Americans are well aware of the service members
whose lives have been lost in Iraq and Afghanistan but are well
insulated from the contractor death toll. Contracting is the
primary means by which the U.S. military is able to complete its
mission without exceeding the personnel limitations imposed by
Congress.23 The current wars would not be sustainable relying on
these military members alone.
The military’s increased reliance on contractors in recent
wars has raised new issues regarding the treatment of injured
contractors returning from overseas. Contractors have
historically been used to supplement the military by performing
tasks thatwhich DoD considers not “inherently governmental.”24
However, the line between what is and is not inherently
governmental is becoming increasingly blurred. Non-inherent
government functions often include providing support to military 23 See Ike Skelton National Defense Authorization Act for Fiscal Year 2011, Pub. L. No. 111-383, 124 Stat. 4137 (2011).24 See FAR Subpart 7.5 (2011). Inherently governmental refers to employment functions that are typically performed by military or federal civilian employees rather than contract employees.
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bases such as maintaining grounds, operating dining facilities,
and performing laundry services.25 However, DoD contractors also
provides security detail services, such as those provided by Xe
Services, formerly Blackwater Worldwide.26 In 2010, base support
and security services made up about 80% percent of the work
performed by DoD contractors in Iraq.27 Consequently, as
military resources are stretched thin by lengthy military
operations on two fronts, the distinction between what is and is
not inherently governmental has become rather opaque. The
contracting workforce has assumed many responsibilities not
previously performed by military members, including security
details. Further, due to the number of contractors working in
hazardous duty locations,28 the risk to these contractors has
increased dramatically. Now, the issue for the government is how
to manage the returning contractor workforce, which often suffers
from many of the same physical and mental maladies as military
veterans.
25 See MOSHE SCHWARTZ, CONG. RES. SERV., R40764, DEPARTMENT OF DEFENSE CONTRACTORS IN IRAQ AND AFGHANISTAN: BACKGROUND AND ANALYSIS 8 (2010), available at http://assets.opencrs.com/rpts/R40764_20100702.pdf.26 See Mark Mazzetti and Emily B. Hager, Secret Desert Force Setup By Blackwater’s Founder, N.Y. Times, May 14, 2011, http://www.nytimes.com/2011/05/15/world/middleeast/15prince.html?ref=blackwaterusa.27 See Schwartz, supra note 25, at 8.28 Need citation
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Professor Steven L. Schooner has written extensively on the
topic of contractor fatalities.29 His articles have unveiled
shocking statistics and brought much needed attention to the
dangers contractors face as they risk their lives to support the
military. Between January and June of 2010, more military
contractors than uniformed service members were killed in
Afghanistan and Iraq.30 There were reportedly 250 contractor
deaths and 235 military deaths during the six month period.31
Even more startling is that three times as many contractor
injuries were reported than military injuries since the beginning
of operations in Iraq in 2001.32 These statistics reflect an
upward trend in contingency contracting casualties, and the
contractor death toll is increasing exponentially compared to
military fatalities. Between 2003 and 2010, contractor deaths
29 Steven L. Schooner is Co-Director of the Government Procurement Law Program at the George Washington University Law School and the Nash & Cibinic Professor of Government Contract Law. His most recent publications on government contractor fatalities include: Steven L. Schooner, Why Contractor Fatalities Matter, PARAMETERS, Aug. 2008, at 78; Steven L. Schooner & Collin D. Swan, Contractors and the Ultimate Sacrifice, SERV. CONTRACTOR., Sept. 2010, at 16; Steven L. Schooner & Collin D. Swan, Dead Contractors: The Un-Examined Effect of Surrogates on the Public’s Casualty Sensitivity, J. NAT’L SEC. LAW & POL’Y (forthcoming 2011).30 See Rogene Fisher Jacquette, Contractor Deaths in Iraq and Afghanistan Outnumber Service Member Deaths, AT WAR: NOTES FROM THE FRONT LINES (Sept. 23, 2010, 2:27 PM), http://atwar.blogs.nytimes.com/2010/09/23/contractor-deaths-in-iraq-and-afghanistan-outnumber-service-member-deaths/?scp=1&sq=contractor%20deaths%20outnumber&st=cse.31 Need citation (probably same as previous)32 See Steven L. Schooner & Collin D. Swan, Contractors and the Ultimate Sacrifice, SERVICE CONTRACTOR, Sept. 2010, at 16, 17.
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rose from five percent of the annual death toll to more than 50%
percent.33 As of March 2011, there were approximately 155,000
private contractors employed by the Department of Defense (DoD)
in Iraq and Afghanistan compared to 145,000 uniformed
personnel.34 Most surprisingly, contractors currently account
for approximately 52% percent of the workforce in Iraq and
Afghanistan35 and on average have outnumbered military personnel
in Afghanistan for the last two years.36 This support has
undoubtedly contributed to the success of the military, but the
reliance on contractors has come at a cost.
Professor Schooner’s articles have brought much needed
transparency to a quiet corner of government contracting. Policy
makers and legislatures, as well as the general public, have
ignored the risks to contractors and have hardly raised an
eyebrow at the staggering trend in contractor fatalities.37 But
perhaps equally as troubling is the trend in contractor injuries,
33 Id. at 17.34 MOSHE SCHWARTZ, CONG. RES. SERV., R40764, DEPARTMENT OF DEFENSE CONTRACTORS IN IRAQ AND AFGHANISTAN: BACKGROUND AND ANALYSIS (2011), available at http://www.fas.org/sgp/crs/natsec/R40764.pdf. The number of contractor and military personnel in Iraq and Afghanistan has decreased from 207,600 contractors and 175,000 military since July 2010. Schwartz, supra note 25, at 8.35 MOSHE SCHWARTZ, CONG. RES. SERV., R40764, DEPARTMENT OF DEFENSE CONTRACTORS IN IRAQ AND AFGHANISTAN: BACKGROUND AND ANALYSIS (2011), available at http://www.fas.org/sgp/crs/natsec/R40764.pdf.36 See James Glanz, Contractors Outnumber U.S. Troops in Afghanistan, N.Y. Times, Sept. 1, 2009, http://www.nytimes.com/2009/09/02/world/asia/02contractors.html.37 Need citation
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which may have even further-reaching consequences. Few
organizations have tracked injuries sustained by contractor
veterans, and even fewer have advocated for contractors or
provided support for their injuries.38 Insurance companies have
predominantly been responsible for employee injuries, but this
has only resulted in increased profits for carriers and excessive
denial of claims for injured workers.39 Given the limited number
of remedies under the current regulatory scheme, the Government
has not been able to limit costs or provide greater care for
contractors. Thus, while contractors are dying in record
numbers, insurance carriers are seeing unprecedented increases in
revenue and profit.40
C. Contractor Veterans Encounter Difficulties After Overseas Employment
The miracle of Kevlar has helped keep many contractors
alive.41 But, after sustaining traumatic injuries overseas,
38 Need citation39 See infra part xxxxxx.40 See DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., ACQUISITION STRATEGY FOR DEFENSE BASE ACT INSURANCE: REPORT TO CONG. IN RESPONSE TO SECTION 843 OF THE NAT’L DEF. AUTHORIZATION ACT FOR FISCAL YEAR 2009 i (2009), available at http://www.acq.osd.mil/dpap/cpf/docs/acq_strategy_defense_base_act_insurance.pdf.41 Steven L. Schooner & Collin D. Swan, Dead Contractors: The Un-Examined Effect of Surrogates on the Public’s Casualty Sensitivity, J. NAT’L SEC. LAW & POL’Y 14 (forthcoming 2011) (citing Atul Gawande, Casualties of War – Military Care for the Wounded from Iraq and Afghanistan, 351 NEW ENGL. J. MED. 2471 (2004), available at http://www.nejm.org/doi/full/10.1056/NEJMp048317).
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injured contractors are faced with new challenges at home.42 In
most cases, family members are able to help manage their loved
ones’ illnesses, but filing claims for medical expenses and
dealing with insurance carriers can be a herculean task.43 Due
to the complex nature of mental health claims, such as those
related to post-traumatic stress disorder (PTSD) and traumatic
brain injury (TBI), the claims process for these cases can be
quite contentious.44 In fact, insurance carriers deny close to
half of all PTSD claims.45 For contractors and their families,
the process of appealing the denial of their claims, in addition
to managing the symptoms of their illnesses, is overwhelming.
Even more disturbing is that these illnesses are not well-
documented. DoD did not even begin tracking data on contractors
in Iraq and Afghanistan until the latter half of 2007.46 It was
not until 2008 that DoD signed an agreement to use the
Synchronized Predeployment and Operational Tracker (SPOT) system,
a system designed to track contractor casualties.47 Before 2007,
the most accurate tally of contractor casualties was tracked by
the Department of Labor’s (DOL) Division of Longshore and Harbor
42 Need citation43 Need citation44 Need citation (probably same as next)45 Wounded Civilian Workers Fight For Care, CBSNEWS.COM, (Jul. 27, 2009), http://www.cbsnews.com/stories/2009/04/17/national/main4951906.shtml?tag=contentMain;contentBody.46 Schwartz, supra note 25, at 4.47 Schooner, supra note 29, at 17.
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Worker Compensation, which tracks insurance claims submitted by
the family or employer of an injured or dead contractor.48 These
statistics provide critical quantitative data, which can be used
to estimate the actual cost of DoD operations, since DoD has
historically failed to account for contractor operations.49
While the implementation of SPOT has assisted the Government in
tracking contractor casualties, the Government Accountability
Office (GAO) and DoD concede that SPOT is still an inadequate
source of data.50
Current research tracking the mental health of contractors
employed in war zones is even scarcer. Studies conducted on
military populations suggest that contractors working in war
zones are probably suffering from the same mental health
disorders as military soldiers.51 According to Dr. Matthew
Friedman, a Veterans Affairs official who heads the national
center for post-traumatic stress syndrome, the issue of mental
illness in contractors has never been reviewed by the
Government.52 Only recently have significant mental health
48 Id.49 Need citation50 See Schooner & Swan, supra note 29, at 27; See also Schwartz, supra note 25, at 4.51 RAND CORP., INVISIBLE WOUNDS OF WAR: PSYCHOLOGICAL AND COGNITIVE INJURIES, THEIR CONSEQUENCES, AND SERVICES TO ASSIST RECOVERY (Terri Tanielian & Lisa H. Jaycox, eds., 2008), available at http://www.rand.org/contentdam/rand/pubs/monographs/2008/RAND_MG720.pdf.52 See James Risen, After Iraq, Contractors Face Mental Health Issues, N.Y.TIMES, Jul. 4, 2007,
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studies on military soldiers in Iraq and Afghanistan been
undertaken. These studies have found that psychological
disorders may be disproportionately high when compared with
physical injuries from the two wars.53 The studies also show
that psychological disorders in the military community are often
left untreated.54 In its 2008 study, the RAND Corporation found
that between 5five and 15%fifteen percent of deployed service
members are affected by PTSD.55 Another 2two to 14%fourteen
percent meet the diagnostic criteria for major depression.56 Of
the soldiers who screened positive for a mental health condition,
the study found that only one-third sought mental health support
while deployed.57 About the same number of soldiers who met
screening criteria for a mental health illness received mental
health support upon their return from deployment.58
The application of these findings to the contractor
community reveals a disturbing picture. Contractor fatalities
recently surpassed military fatalities,59 suggesting contractors
are being exposed to many of the same hazards as military
members. Given this statistic, it is reasonable to conclude that
http://www.nytimes.com/2007/07/04/health/psychology/04cnd-contractors.html.53 See Terri Tanielian & Lisa H. Jaycox, supra note 51.54 Id. at 251.55 Id. at iii.56 Id. at 250.57 Need citation (likely same source)58 Id. at 251.59 Need citation (probably the same as fn. 31)
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there may be a large number of U.S. contractors who are in need
of mental health treatment. This exposure likely includes many
second and third-tier subcontractors who are not as savvy or
sophisticated as prime contractors and are even less likely to
utilize DBA benefits.
One contractor found that a significant percentage of his
employees were not receiving needed mental health care.60 Paul
Brand, a psychologist and Chief Executive Officer of the firm
Mission Critical Psychological Services (MCPS), L.L.C., 61
independently conducted a study on contractors’ mental health
while working at DynCorp, the Department of State’s (DOS) largest
contractor. He found that 24%twenty-four percent of contract
employees from DynCorp had symptoms of PTSD or depression after
60 See T. Christian Miller, The Other Victims of Battlefield Stress: Defense Contractors’ Mental Health Neglected, PROPUBLICA.ORG, (Feb. 26, 2010, 2:48 AM), http://www.propublica.org/article/injured-contractors-the-other-victims-of-battlefield-stress-224.61 Paul Brand, Ph.D., founded MCPS to offer psychological screening and services for people working in war-torn areas. Before starting MCPS, as the president of Medina & Thompson, Inc., Dr. Brand developed psychological fitness programs to support police officers sent to Haiti, Bosnia, Kosovo, Israel, Liberia, and East Timor as part of peacekeeping initiatives. Dr. Brand also helped DynCorp International, the Department of State's largest contractor, become the first company with comprehensive psychological support for its employees serving in Iraq and Afghanistan. Dr. Brand holds his Ph.D. in Psychology from the Illinois Institute of Technology and has lived and worked in Kosovo, Afghanistan and Iraq, as well as the United States. MISSION CRITICAL PSYCHOLOGICAL SERVICES, LLC, http://www.missioncriticalpsych.com/ (last visited Jul. 7, 2011).
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their overseas employment.62 He also found that many of the
contractors had never received mental health screening and were
not receiving treatment for their symptoms.63 Based on his
study, he estimated that thousands more contractors employed by
other firms were probably not being screened or receiving
treatment of any type.64
The importance of these findings lies in the relationship
between mental health and suicide. Researchers have long
believed that mental health and suicide are closely related.65
As senior military officials struggle to balance troop
deployments with fluctuating financial constraints, they remain
highly cognizant of the long-standing concern about suicide among
military personnel.66 Studies show that the majority of persons
who have committed suicide suffered from at least one mental
disorder.67 Reducing suicide incidents, which is experiencing
renewed importance in the military, is therefore dependent upon
62 Miller, supra note 60. As previously mentioned, RAND Corp. reported that 5five to 15%fifteen percent of military members reported symptoms of PTSD and 2two to 14%fourteen percent met the criteria for major depression. See RAND CORP., supra note 51, at 250. These statistics suggest that perhaps a higher percentage of contractors are suffering from mental health problems than military members.63 Need citation (probably previous source)64 Need citation (same as last)65 See Terri Tanielian & Lisa H. Jaycox, supra note 51, at 128.66 Need citation67 Id.
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obtaining treatment for soldiers and contractors who are in need
of mental health care.
The fast-paced operations tempo and the duration of recent
wars have caused a rise in suicide among military personnel, a
situation thatwhich has caught DoD by surprise.68 Between 2005
and 2009, 1,100 military members took their lives,; the
equivalent of one member every 36 hours.69 The suicide rate in
all services has increased since 2001, but the rate in the Army
has more than doubled.70 Among Army personnel, the suicide rate
has exceeded that of the civilian population since 2005.71 The
rising suicide rates shocked military leaders and congressional
leaders to such an extent that when Congress passed the Duncan
Hunter National Defense Authorization Act for Fiscal Year 2009
(NDAA for 2009), they directed the Secretary of Defense to
establish a task force to examine matters related to suicide
prevention in the Armed Forces.72 The DoD task force submitted a
detailed suicide report to the Committees on Armed Services of
the Senate and House of Representatives in August, 2010.73 They
68 DEPARTMENT OF DEFENSE TASK FORCE ON THE PREVENTION OF SUICIDE BY MEMBERS OF THE ARMED FORCES, THE CHALLENGE AND THE PROMISE: STRENGTHENING THE FORCE, PREVENTING SUICIDE AND SAVING LIVES (2010), available at http://www.health.mil/dhb/downloads/Suicide%20Prevention%20Task%20Force%20report%2008-21-10_V4_RLN.pdf.69 Id. at ES-1.70 Id. at ES-2.71 Id. at 15.72 See Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, Pub. L. No. 110-417 §843733, 122 Stat. 4540 (2008).73 Need citation (likely same as fn. 75)
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made 49 findings and 76 recommendations across four focus
areas.74 While the task force found that military policy on the
delivery of mental health care to the Armed Forces is well-
intended, it concluded that the system is unorganized and lacking
in mental health professionals and other necessary resources.75
The renewed focus on mental health in the military is a
positive sign that DoD is finally addressing this critical need
of its warfighters. The focus will undoubtedly improve the
overall effectiveness of the U.S. military.
However, none of the strategies cited in the DoD study and
almost none of DoD’s resources will be dedicated to helping U.S.
contractors in their fight against mental illness. Contractors
working alongside the U.S. military are experiencing combat
stress and battle-fatigue but are off the radar and out of the
scope of DoD officials.76 Unlike the military, there is no
support network in place to help injured contractors cope with
the stress of their injuries or navigate the medical claims
process.77 Without the necessary support and resources,
74 Need citation (likely same as fn. 75)75 DEPARTMENT OF DEFENSE TASK FORCE ON THE PREVENTION OF SUICIDE BY MEMBERS OF THE ARMED FORCES, supra note 68, at ES-2.76 Need citation77 Advocacy or support for wounded contractors has been limited to volunteer providers. Jana Crowder, who operates a website dedicated to injured contractors, is one such provider. She is the organizer of a Tennessee support group for injured contractors, and, though not a health professional, has helped injured contractor veterans returning from Iraq. AMERICAN CONTRACTORS IN IRAQ, http://www.americancontractorsiniraq.com/
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contractors are left to fight the symptoms of their illnesses on
their own.78
II. Problems With The Current Regulatory Scheme
(last visited Jul. 8, 2011).78 Beginning in 2007, three media outlets, The Los Angeles Times, ABC News, and ProPublica, began reporting on the tribulations of injured contractors returning from Iraq and Afghanistan. The stories of these injured contractors are disturbing. One contractor, Preston Wheeler, was a truck driver employed by Kellog, Brown, and Root (KBR) in Iraq, who witnessed the murder of his co-worker in 2005. It took Mr. Preston two years to find a support group in which he could begin to confront his emotional problems. Another KBR employee, Robert Rho, was also injured in Iraq and fought with his insurance carrier over benefits for years after his return. A third KBR contractor had to bring his case to the attention of Tennessee Senator Lamar Alexander before receiving his DBA entitlements. However, the most horrific example of exploiting contractor veterans and their families is the case of Wade Dill. Mr. Dill accepted a job in Afghanistan performing pest extermination services to help pay for his daughter’s college education. On one occasion Mr. Dill was called to clean up the remains of a young soldier who had shot himself in the head. The task had such a profound and disabling effect on Mr. Dill that eventually Mr. Dill quit his job and separated from his wife. On July 16, 2006, Mr. Dill was found dead in a local hotel room a few miles from their home. He had left a note, which read “I did exist and I loved you.” His wife, Barbara Dill, filed a claim with KBR’s insurance provider, AIG, claiming her husband’s death was a result of PTSD brought on by his employment in Iraq. Three experts offered opinions on the issue, and all agreed that Mr. Dill suffered from PTSD. However, the expert for AIG believed the illness was caused by marital and family problems, and believed it was unrelated to the stresses of his employment in Iraq. The DOL recommended AIG pay the claim, but AIG refused. Ms. Dill’s only recourse was to file an appeal through DOL’s dispute resolution system, a process thatwhich can take months or even years to complete. She eventually won her appeal in 2011, five years after her husband’s death. See Day to Day: Iraq Contractors Convene in Tennessee, National Public Radio (Feb. 12, 2007), http://www.npr.org/templates/story/story.php?
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A. The Longshore and Harbor Workers’ Compensation Act, the Defense Base Act, and the War Hazard Compensation Act
Congress is now debating alternatives to the regulatory
scheme that protects contractors overseas,79 but the merits of
these alternatives must be weighed against current regulations.
The Government provides workers’ compensation benefits to various
categories of employees who perform work for the Government.80
In some cases, the Government provides these benefits directly,
with funds appropriated by Congress.81 In other cases, the
Government mandates that contractors provide these benefits to
their employees.82 Benefits are generally distributed based on
one of four employee types: military, civil service, non-
appropriated fund instrumentality (NFI), and contractor
employees.83
All members of the U.S. military are eligible to receive pay
and benefits, including pay and benefits for injuries, medical
storyId=7364190; See also T. Christian Miller, The War’s Quiet Scandal, The Daily Beast, Feb. 25, 2010, www.thedailybeast.com/blogs-and-stories/2010-02-25/the-wars-quiet-scandal/full. For death benefit award decision, see ALJ’s Decision and Order, Barbara Dill, Case No. 2008-LDA-00259 (Dep’t of Labor Jan. 21, 2011), available at http://www.oalj.dol.gov/Decisions/ALJ/LDA/2008/DILL_BarbaraWID_v_SERVICE_EMPLOYEES_IN_2008LDA00259_%28JAN_21_2011%29_134436_CADEC_SD.pdf.79 Need citation80 Need citation81 Need citation82 Need citation83 Need citation
21
expenses, and life insurance coverage.84 Almost any injury or
death of a military member while in active status entitles the
member to benefits, regardless of whether the member was
performing military duties when he or she wasthey were injured or
killed.85 Funding for military benefits is provided through
congressional appropriations to DoD, which oversees the Military
Health System (MHS).86
Civilian employees, or “civil servants,” are directly
employed by the Government and receive compensation for work-
related injuries under Title 5, Chapter 81, of the United States
Code.87 The Federal Employees’ Compensation Act (FECA) provides
funding for the benefits received by civil servants covered by
the statute.88 The benefits are comprehensive and cover
compensation for disability and death of employees,89 death
gratuities for injuries in connection with an employee’s service
with an Armed Force,90 and medical services.
84 10 U.S.C. 1074 (2006).85 10 U.S.C. 1074(a)(2) (2006).86 See RICHARD A. BEST, JR., CONG. RESEARCH SERV., IB93103, MILITARY MEDICAL CARE SERVICES: QUESTIONS AND ANSWERS (2005), available at http://www.fas.org/sgp/crs/misc/IB93103.pdf.87 See 5 U.S.C. §§ 8101-8152 (2006).88 This U.S. Treasury fund is a collection point for appropriations made by Congress for the purpose of paying compensation and other benefits and expenses to eligible federal employees. See U.S. DEPARTMENT OF LABOR, DIVISION OF FEDERAL EMPLOYEES’ COMPENSATION, PROCEDURAL MANUAL, available at http://www.dol.gov/owcp/dfec/procedure-manual.htm.89 5 U.S.C. § 8102 (2006).90 5 U.S.C. § 8102(a) (2006).
22
Compensation for injuries or death for NFI employees and
contractors is not directly paid for by appropriated funds.
Rather, through various amendments, Congress has directed that
NFIs and contractors provide benefits granted under the Longshore
and Harbor Workers’ Compensation Act (LHWCA) to their
employees.91 The LHWCA was enacted in 1927 and is administered
by the Office of Workers’ Compensation Programs (OWCP), under the
DOL.92 As the title of the statute suggests, the LHWCA was
originally intended to provide compensation for the disability or
death of a maritime employee if the disability or death arose
from an injury occurring upon the navigable waters of the United
States.93 However, through various amendments, the Government
has used the LHWCA to provide coverage to workers engaged in a
wide-range of public works projects.94 The statute requires
employers to provide coverage for qualifying employees who are
performing work for the Government in certain areas.95
The LHWCA contains benefits for many specific contingencies.
Benefits include medical services, supplies, and even choice of
physician.96 The statute also provides for disability and death
91 See Longshore and Harbor Workers’ Compensation Act, 33 U.S.C. §§ 901-950 (2006).92 Division of Longshore and Harbor Workers' Compensation, DOL.GOV, http://www.dol.gov/owcp/dlhwc/LS-560pam.htm (last visited Jan. 23, 2011).93 33 U.S.C. § 903 (2006).94 Need citation95 See Longshore and Harbor Workers’ Compensation Act, § 904.96 Longshore and Harbor Workers’ Compensation Act § 907(a)-(b).
23
benefits, depending on whether an injury is permanent or
temporary and whether the worker is partially or totally
disabled.97 Typically, injured workers receive two-thirds of
their average weekly wages for the duration of their
disability.98 Congress has used the LHWCA as the basic framework
for providing workers’ compensation benefits to government
workers who are not directly employed by the Government, such as
NFI employees.99
97 Longshore and Harbor Workers’ Compensation Act § 908. Specific injuries are listed with particularity in the statute, such as: “Compensation for loss of more than one phalange of a digit shall be the same as for loss of the entire digit. Compensation for loss of the first phalange shall be one-half of the compensation for loss of the entire digit.”98 Longshore and Harbor Workers’ Compensation Act § 908.99 See 5 U.S.C. § 2105(c) (2006). DoD uses NFIs to maintain morale, welfare, and recreation (MWR) programs and facilities for the Armed Forces. NFIs are generally operated by civilians who are employed by the Armed Forces “services” sector, and include operating post exchanges, child day-care centers, and indoor and outdoor recreation facilities under the jurisdiction of the Armed Forces. Due to their support role, NFI employees are often co-located with deployed forces. However, regardless of whether they are located inside or outside the continental United States, NFI employees are covered by the LHWCA for work-related injuries. The law thatwhich extends coverage under the LHWCA to NFI employees is the Nonappropriated Fund Instrumentalities Act (NFIA). Under NFIA, benefits are paid for with revenues generated by the NFIs rather than appropriated funds. See also Who Are NAF Employees?, Dep’t of Def. Civilian Personnel Mgmt Servs, http://www.cpms.osd.mil/ASSETS/87993068876A450DA03A6C76F6737D28/Who%20are%20NAF%20employees-Item%20of%20Interest.pdf; See also Johnson v. U.S., 600 F.2d 1218 (6th Cir. 1979); See also James M. Mesnard, Exclusivity Under the Act, 6 Loy. Mar. L.J. 59 (2008); See also Nonappropriated Fund Instrumentalities Act, 5 U.S.C. § 8171 (2006).
24
Workers’ compensation for contractors operates much the same
way. The DBA extends coverage under the LHWCA by requiring
government contractors to provide their employees with LHWCA
benefits.100 The DBA was enacted in 1941 as a result of an almost
tenfold increase in the use of civilian contractors between World
War I and World War II.101 The purpose of the law was to clarify
and limit the liability of the Government and defense contractors
while ensuring the protection of civilian laborers.102 Originally
intended to cover only contractors working on military bases, the
DBA has been amended a number of times to provide expanded
coverage for contractors engaged in public work projects
regardless of whether they work on a military base.103 The law
requires businesses to provide compensation in the event of
injury or death to their employees working “at any military, air,
or naval base. . . or upon lands occupied or used by the United
States. . . or upon any public work. . . outside the continental
United States. . . .”104 The term “public work” is broadly
defined in the statute and includes “any project . . . involving
100 See Defense Base Act, 42 U.S.C. §§ 1651-1654 (2006).101 Greta S. Milligan, The Defense Base Act: An Outdated Law and its current implications, 86 U. DET. MERCY L. REV. 407, 411 (2009) (85,000 civilians accompanied the military during World War I, as compared to 734,000 in World War II).102 Kerry J. Anzalone, The Defense Base Act—A Growth Industry?, Benefits Rev. Bd. Serv., Longshore Reptr. (2004), available at http://www.oalj.dol.gov/PUBLIC/LONGSHORE/REFERENCES/REFERENCE_WORKS/THE_DEFENSE_BASE_ACT(2004).HTM.103 Need citation104 Defense Base Act, 42 U.S.C. §§ 1651(a)(3) (2006).
25
construction, alteration, removal or repair for the public use of
the United States or its allies . . . including service contracts
. . . and ancillary work in connection therewith . . . .”105
Today, almost all U.S. contractors working on building projects
outside the continental United States — such as dams, harbor
improvements, roadways, and housing — are covered under the
DBA.106
Coverage under the DBA is monitored by the DOL, but the DOL
does not process claims or secure insurance for contractors.107
The DBA requires contractors to purchase insurance with a
provider of their choice, or self-insure.108 The DOL generates a
list of prequalified DBA providers from which contractors can
choose.109 The cost of this insurance is allowable and allocable
under cost-type contracts.110
A unique aspect of DBA insurance is coverage for injuries
caused by acts of war. The War Hazard Compensation Act (WHCA),111
105 Defense Base Act, § 1651(b)(1). In Casey v. Chapman College, 23 BRBS 7 (1989), the Board held that a professor of Asian Studies who was injured on a U.S. Naval Base in Japan was covered under the DBA. The Board found that his employment teaching Asian Studies in the Pacific to Navy personnel was related to national defense and therefore constituted the "public work" required for coverage.106 See Anzalone, supra note 102.107 Need citation108 Need citation109 See Dep’t of Labor, Defense Base Act: Workers’ Compensation for Employees of U.S. Government Contractors Working Overseas, page 2, http://www.dol.gov/owcp/dlhwc/ExplainingDBA.pdf.110 FAR 31.205-19 (2011).111 War Hazard Compensation Act, 42 U.S.C. 1701(a) (2006).
26
enacted in 1942, provides compensation directly from the coffers
of the Government in cases of injury or death to employees
resulting from a “war-risk hazard.”112 Essentially, the
Government self-insures when a contractor is injured by an act of
war. A war-risk hazard is defined in the statute, and includes
hazards caused by the discharging of weapons or explosives by a
hostile force,113 the operation of vessels or aircraft in a zone
of hostilities or engaged in war time activities,114 or any action
of a hostile force or person,115 including the detention of
contractors by hostile forces.116 By relieving insurance carriers
from the risk of insuring against injuries or death caused by
war, the Government intended to help contractors obtain DBA
insurance at fair premiums.117
In summary, then, three basic insurance laws are implicated
when contractors employed by the Government are injured or killed
112 Id. Reimbursement for injuries or death is paid for with appropriated funds, similar to the payment of claims under the Federal Employees Compensation Act (FECA). An important caveat here is that insurance companies must pay WHCA claims up-front, and may only be fully reimbursed if it is later shown that the injury or death was caused by a war-risk hazard. This system can create an incentive for carriers to initially deny claims.113 War Hazard Compensation Act, § 201(1).114 War Hazard Compensation Act, § 201(5).115 War Hazard Compensation Act, § 201(2).116 War Hazard Compensation Act, § 101(b).117 Jeffrey L. Robb, Workers Compensation for Defense Contractor Employees Accompanying the Armed Forces, 33 PUB. CONT. L.J. at 423, 431 (2004).
27
overseas: (1) the LHWCA, (2) the DBA, and (3) the WHCA.118 Two
other laws, the Mutual Security Act of 1954 and the Dayton Peace
Accords of 1995 are also implicated, but less frequently, as they
apply to U.S. contractors under contract with foreign
governments.119 Though these statutes have provided a
satisfactory framework for protecting injured contractors in the
past, the cost of DBA insurance has become unacceptably high,
especially given the complaints congressional leaders have
recently begun to examine.
B. DBA Insurance Concerns: Rising Costs and Denial of Claims
The above compensation scheme was originally intended to
provide workers’ compensation-type benefits to contractor
employees and to limit the liability of both the Government and
defense contractors. Not surprisingly, Congress’s concerns with
the scheme today are still economically driven, exacerbated by
118 Much like FECA, an exclusivity clause in the DBA limits employer liability to that of the statute, and excludes all other workers’ compensation liability imposed by any state or other federal entity. Thus, the DBA and accompanying laws provide the only recourse for injured contractors. See 5 U.S.C. § 8173 (2006); See also Defense Base Act, 42 U.S.C. § 1651(c) (2006) (“This liability is exclusive and instead of all other liability of the United States . . . in a civil action, or in admiralty, or by an administrative or judicial proceeding under a workmen's compensation statute or under a Federal tort liability statute”).119 See The Mutual Security Act of 1954, Pub. L. 83-665, 62 Stat. 850 (codified as amended in scattered sections of 22 U.S.C.); See also The Dayton Peace Accords, Nov. 21, 1995, 35 I.L.M. 75 (1996).
28
the unprecedented number of claims in the last decade.120
Congress simply never envisioned contractors working so closely
with military personnel for such protracted periods. However, it
is anachronistic to think the problems with DBA insurance are
limited to issues of cost. The denial and delayed processing of
medical claims by insurance companies has left many contractors
without critical care.121 Sadly, treatment for mental health care
has been particularly susceptible to insurance carriers’ heavy-
handed denial of claims.122
The Government has done a commendable job of creating an
insurance regulatory scheme for government contractors. However,
the coverage comes at a high price. The rise in DBA insurance
premiums is the primary catalyst for recent congressional
action.123 The NDAA for 2009 included a section in which Congress
directed DoD to address escalating costs of DBA insurance.124 DoD
undertook a nearly year-long study and found that Congress’s cost
concerns were not unwarranted.125 DoD found that between 2002 and
2008, the DBA insurance market grew from about $18 million to
more than $400 million in government premiums.126 Comparing war
120 Need citation121 Need citation122 Need citation123 Need citation124 See Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, supra note 19.125 Need citation (probably same as next)126 DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at i.
29
zone and non-war zone premiums, DoD found that war zones premiums
were 90% percent higher than non-war zone premiums. DoD also
found that 88% percent of all premiums were for prime or
subcontracts that had their primary place of performance in Iraq
and Afghanistan.127 Perhaps not surprisingly, the high insurance
premiums in war zones are a result of four major factors: (1)
logistical challenges, (2) volatility in the workplace, (3) the
volume of claims, including controverted claims and subsequent
litigation, and (4) a lack of competition in the DBA insurance
business.128
The logistical challenges of providing DBA insurance are
tremendous. Iraq and Afghanistan lack adequate medical
facilities, infrastructure, and medical resources.129 Routine
injuries may require medical evacuation simply because the proper
facilities or experts are not available.130 Insurance carriers
are often required to make reimbursements in different
currencies, and claims can involve parties or witnesses who speak
different languages, have different cultural norms, and are
thousands of miles apart.131 Such variables result in increased
127 Id. at 34.128 Need citation (probably same as previous)129 See id. at 4.130 See id.131 Need citation (probably same as previous)
30
costs, especially when a significant number of overseas
contractors have absolutely no presence in the United States.132
Volatility in the workplace is another factor that creates
high premiums. DBA insurance involves more than paying benefits
to injured workers; it is the transferring of risk from employees
to employers and insurance carriers. Actuaries, employed by
insurance carriers, analyze statistical data and use mathematical
formulas to derive risk probabilities for a multitude of loss
scenarios.133 Carriers then use these calculations to set
premiums to cover the risk and to calculate what assets must be
kept in reserve to pay for potential losses.134 Generally,
actuaries must know (1) the chance an event will take place, (2)
the amount of loss from the event, (3) the premium for each
category of policyholder, and (4) the amount that must be kept in
reserve to pay for the loss when the event occurs.135 If this
data is accurate, insurance carriers can spread their risk across
insureds in similar risk “pools”136 so that losses can be shared
over time.
132 See House Hearing on Defense Base Act, supra note 14H. COMM. ON OVERSIGHT AND GOV’T REFORM , supra note 14, at 2 (statement of Seth Harris, Deputy Sec’y, Dep’t of Labor).133 See Michelle E. Boardman, Known Unknowns: The Illusion of Terrorism Insurance, 93 GEO. L.J. 783, 810 (2005).134 See id. at 809.135 See id. at 813.136 See id. at 809.
31
The volatility of workplaces like Iraq and Afghanistan, with
unstable governments, weak economies, and poor infrastructure,
make actuarial calculations exceptionally difficult. Unlike the
domestic workplace, employees remain in-country for many months
and do not leave their work environment except when taking
leave.137 When leave is taken, it often involves a precarious
exit from the country.138 This unpredictability makes estimating
the costs associated with providing DBA insurance extremely
problematic.139 Actuaries lack the extensive historical data on
losses in Iraq and Afghanistan that they do for losses in the
domestic insurance market,140 as efforts to track injuries have
only recently begun.141 Thus, insurance carriers are likely to
either underestimate or overestimate insurance premiums. As a
result, insurance carriers continue to front-load these risks
into premiums and insurance rates.142
DoD addressed the issue of excessive industry profits in
itstheir 2009 report to Congress.143 The report stated plainly
137 Need citation138 Need citation139 Need citation140 See DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 4.141 Schwartz, supra note 25, at 4.142 Rebecca U. Weiner, The Hidden Costs of Contracting: Private Law, Commercial Imperatives and the Privatized Military Industry (Dec. 2008) (unpublished fellowship paper, International Security Program, Belfer Center for Science and International Affairs, Harvard Kennedy School) (on file with the Harvard Kennedy School).143 Need citation (likely same as next)
32
that DBA insurers were achieving significant underwritings
gains.144 Relying on a 2008 memorandum, DoD reported that the
House Oversight and Government Reform Committee had conducted a
study and found that AIG had collected more than $1.3 billion in
premiums but had paid only $500 million in benefits, a 40%
percent profit margin.145 Likewise, an Army Audit Agency report
found that during the period from 2003 to 2005, Kellogg, Brown,
and Root (KBR) paid $284 million in premiums to AIG, but AIG was
predicted to pay only $73 million for the care of KBR
employees.146 It seems providers of DBA insurance have protected
themselves from volatility by keeping premiums high and denying
costly claims.147
If there is any certainty concerning Iraq and Afghanistan,
it is that troop movements and re-building projects will remain
volatile. As re-building projects wane, the civilian workforce
144 DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 7.145 See Defense Base Act Insurance: Are Taxpayers Paying Too Much?: Hearing Before the H. Comm. on Oversight and Gov’t Reform, 110th Cong. 1 (2008), available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_house_hearings&docid=f:44912.pdf (statement of Rep. Henry Waxman, Chairman, H. Comm. on Oversight and Gov’t Reform).146 Id.147 Despite these findings, DoD does not place blame for the high cost of DBA insurance on rising profits. Rather, their report lists a number of other factors, including broker commissions, sales and marketing, and other administrative costs, as contributing factors. Congress, on the other hand, has expressed greater concern over the exorbitant profits. This tension is partly what has framed the debate between DoD and Congress on how DBA insurance should be secured in the future.
33
will be withdrawn and DBA insurance premiums will decline.148
However, injured contractors, often younger than their domestic
counterparts, may be entitled to reimbursements for injuries well
into the future.149 For this reason, insurance companies are
extremely cognizant of the number and type of claims they will
pay and the effect of such payments on their revenue after their
premium streams decline.150
The rising number of claims has also contributed to higher
premiums. In 2008, the escalating number of claims forced the
Division of Longshore and Harbors’ Workers Compensation (DLHWC),
which oversees the processing of all DBA claims, to restructure
its claims processing.151 DLHWC divided all Middle East DBA
claims, previously processed through its New York City office,
among its 97 employees located in eleven different district
offices.152 The increase in volume of claims has raised costs for
both industry and government.153
While the volume of claims has driven premium rates higher,
controverted claims and claims in litigation have also
148 Need citation (possibly same as fn. 150)149 Need citation (possibly same as fn. 150)150 See T. Christian Miller & Doug Smith, Injured War Zone Contractors Fight to Get Care, L.A. TIMES (Apr. 16, 2009, 10:25 PM), http://articles.latimes.com/2009/apr/17/nation/na-contractors17.151 Need citation (possibly same as next)152 See OFFICE OF WORKERS’ COMPENSATION PROGRAMS, Annual Report to Congress FY 2008 (2008), available at http://www.dol.gov/owcp/08owcpmx.pdf.153 Need citation (possibly same as previous)
34
contributed to rising rates. Under the LHWCA, an insurance
carrier (or employer, if the employer is self-insured), has
fourteen days from the date of notification of the injury to make
payment to the employee.154 Given this short period of time,
costly claims or those that involve more complex issues, such as
PTSD, are often “controverted.”155 Insurance carriers will
typically hire their own experts to examine records and
documents, even though an employee’s physician has already made a
diagnosis and recommendation for treatment.156 This situation
usually results in conflicting expert testimony, causing lengthy
delays in claims processing.157
Controverted claims involving WHCA reimbursements have also
contributed inefficiencies to the claims processing system
resulting in tremendous economic waste. Under the WHCA,
insurance carriers are not reimbursed for war-risk hazards until
154 See Longshore and Harbor Workers’ Compensation Act, 33 U.S.C. § 914(b) (2006).155 20 C.F.R. § 702.251 (2011).156 Need citation157 Uncertainty in the U.S. courts of appeals regarding the correct judicial forum for appeals under the DBA has only extended the litigation of these claims. The Fourth, Fifth, Sixth, and Eleventh Circuit Courts have concluded that appeals should begin in the district courts, while the Ninth Circuit has held that appeals from the DOL’s administrative process should be heard by courts of appeals. See Claire Been, Bypassing Redundancy: Resolving the Jurisdictional Dilemma Under the Defense Base Act, 83 WASH. L., REV. 219 (2008); See also Heather Ruhlman, Service Employees International v. Director, Office of Workers’ Compensation Programs: Increasing the Uncertainty Regarding The Proper Courts for Jurisdictional Review of Claims Under the Defense Base Act, 44 CREIGHTON L. REV. 769 (2011).
35
the insurance carrier pays the insured’s DBA claim.158 The DOL
issued a bulletin to insurance carriers strongly recommending
that carriers obtain a compensation order delineating the
insured’s entitlement to benefits, the rate of compensation, and
the period of payment, even before submitting a request to be
reimbursed under the WHCA.159 An insurance carrier must therefore
make a determination to pay or dispute a claim well before a
reimbursement determination is ever made. This creates an
incentive for insurance carriers to deny potential WHCA claims
until they can obtain an order by an administrative law judge
expressly finding that an injury resulted from a war-risk hazard.
Once an order is obtained, insurance carriers can better support
their claim for WHCA reimbursement.160 This method of disputing
claims wastes Government and industry resources and inflates the
cost of the dispute process.
Lack of competition has also contributed to increased
premiums. In the NDAA for 2009, Congress asked the Secretary of
Defense to develop an acquisition strategy for DBA insurance
thatwhich would minimize costs to DoD and defense contractors and
“provide for a competitive marketplace. . . to the maximum extent
158 20 C.F.R. § 61.101 (2011).159 OFFICE OF WORKERS’ COMPENSATION PROGRAMS, OWCP BULLETIN NO. 05-01, WAR HAZARD COMPENSATION ACT—CLAIMS FOR REIMBURSEMENT AND DETENTION BENEFIT PROCEDURES (2005), available at http://www.dol.gov/owcp/dfec/regs/compliance/DFECFolio/OWCPBulletin05-01.pdf.160 Need citation
36
practicable.”161 Competition, however, has not been a hallmark of
procuring DBA insurance. In fact, on August 8, 2003, shortly
after the invasion of Iraq, DoD solicited proposals to provide
DBA insurance under a “single-provider” DoD-wide program.162 The
solicitation was left open for almost a month, but not a single
insurance carrier submitted a proposal.163
Two other agencies, however, have had more success
soliciting single-provider insurance for their agencies. The
Department of State (DOS) and the U.S. Agency for International
Development (USAID) have used single-provider programs for some
time.164 Under this system, rather than securing their own
insurance, contractors are required to use the insurance carrier
selected through competition by the contracting agency.165 While
the strategy has been successful in the past, DOS and USAID have
recently struggled to generate competition for DBA insurance
contracts.166 When DOS and USAID most recently issued DBA
insurance proposals for their respective agencies, only one
161 Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, Pub. L. No. 110-417 §843 (b)(5), 122 Stat. 4540 (2008). 42 U.S.C. § 1655(b)(5) (2008).162 Need citation (likely same as next)163 Bechtel Benefits as Iraq Contractors Struggle to Get Insurance, BLOOMBERG.COM, (Nov. 21, 2003) http://quote.bloomberg.com/apps/news?pid=mifea&sid=aviqx1uyGJh0).164 DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 7.165 Need citation (possibly same as previous)166 Need citation (possibly same as previous)
37
insurance carrier, CNA, offered a proposal.167 Single-provider
competition for DBA insurance for the U.S. Army Corps of
Engineers (USACE) met the same results, receiving only one
proposal from CNA in a recent competition.168
Even when contractors secure their own DBA insurance on the
open market, three major carriers provided a majority of the
insurance. Out of 32 carriers that provide DBA insurance, AIG,
CNA, and ACE account for 97% percent of all the premiums
collected.169 Twenty-nine carriers make up the additional three
percent.170 AIG alone accounts for 75% percent of the total DBA
insurance policy premiums.171 A business in which a single
company controls the lion’s share of the market can be very
costly.172 Further, when claims processing problems arise,
claimants and contracting agencies have a much harder time
lobbying for changes.173
A second major concern, almost completely overlooked by
Government and industry, is that claimants are too often being
denied reimbursement for medical treatment. A problem that
existed early in the days of the Iraq invasion, which
unbelievably is still a problem today, is that employers simply
167 Id.168 Id.169 Id. at 28.170 Need citation (likely same as previous)171 Id.172 Need citation173 Need citation
38
fail to secure DBA insurance.174 When the Iraq war began in
March, 2003, contractors were woefully ignorant of the
requirements of the DBA.175 Employees were often sent to work in
war zones without workers’ compensation insurance.176 The
chronicles of contractors’ missteps in this area in the early day
of the Iraqi war are ghastly.177
The Army was apparently aware that contracts were being
awarded without the required DBA clause because the Defense
Acquisition Excellence Council briefed the issue at a March 18,
174 Need citation (possibly same as next)175 See Susie Dow, Iraq, Contingency Contracting, and the Defense Base Act, EPLURIBUSMEDIA.ORG, http://www.epluribusmedia.org/features/2007/20070304_contingency_contracting_p2.html.176 Need citation (possibly same as previous)177 Susie Dow, a contributor for ePluribus Media, maintains a blog documenting the tragedy of Kirk Von Ackerman and Ryan Manelick, two former U.S. Air Force officers, killed in Iraq. The two men were hired to work for Ultra Services, an Army contractor in Istanbul, Turkey. On October 9, 2003, Von Ackerman left Forward Operating Base (FOB) Pacesetter near Balad, Iraq, and was never seen again. Two months later, Ryan Manelick, his co-worker, was shot to death in his vehicle after leaving a meeting at Camp Anaconda at Balad Air Base. The Army was not able to determine whether the deaths were related. Von Ackerman left behind a wife and three children. After his disappearance, his wife filed a claim for compensation under the DBA. However, Ultra Services had not secured DBA insurance for Von Ackerman or Manelick. In fact, company executives said they had never heard of DBA insurance even though they had collected revenues of more than $12 million in government contracts. See Susie Dow & Steven Reich, One Missing, One Dead: An Iraq Contractor in the Fog of War, EPLURIBUSMEDIA.ORG, (May 12, 2006), http://www.epluribusmedia.org/features/2006/20060512_missingman_p1.html.
39
2003 council meeting.178 One of the presenters, Alan Chvotkin,
specifically informed the council that DBA coverage was being
overlooked and contracts were being awarded without DBA
coverage.179 Mr. Chvotkin stated that due to the lack of
familiarity with the requirement by some contracting officers
(COs), the urgency within which contracts were being awarded in
Iraq, and the ambiguity of the scope of coverage of the DBA
clause, these clauses were often left out of overseas
contracts.180 Even after the Army had recognized the problem,
accurate information was still not reaching COs and defense
contractors. Two years later, in November 2005, a company called
Wolfpack Security, Inc., denied it was responsible for securing
DBA insurance after an injured employee had incurred $700,000 in
medical expenses.181
178 Michael J. Dudley, Contractors on the Battlefield: Part III, DCMA COMMUNICATOR, Fall 2004-Winter 2005, at 28, 33.179 Dow, supra note 174.180 Id.181 See T. Christian Miller, Forgotten Warriors: Russell Skoug’s Story, PROPUBLICA (April 16, 2009, 10:25 PM), http://www.propublica.org/article/forgotten-warriors-russell-skougs-story-416. On September 11, 2006, Mr. Skoug was traveling with an Army Special Forces unit when their convoy ran over an anti-tank mine. Mr. Skoug survived, due in part to his bulletproof vest and the armor-plated truck. The president of Wolfpack, Mark Atwood, acknowledged that a number of mistakes had been made with respect to Mr. Skoug’s injuries, but denied his company was required to secure DBA insurance for its employees. Mr. Atwood claimed that Wolfpack’s contract with the Army didn’t require DBA insurance, and that the Army should never have allowed Mr. Skoug to travel with an Army Special Forces convoy.
40
It is difficult to believe that DoD simply needs more time
to communicate DBA requirements to the field. These requirements
have been in effect since 1941.182 While the role of contractors
has changed since that time, contractors have been intimately
involved in the war effort since Gulf War I in 1991.183 During a
June 18, 2009, House Committee hearing, the former Deputy
Secretary of the Department of Labor flatly stated that “the DOL
is limited in its ability to guarantee that all employers have
the necessary insurance as there is no comprehensive system for
tracking overseas contracts, contractors, and subcontractors, and
workers under each contract.”184 He went on to say that it is
sometimes difficult for the DOL to even identify the employer,
the prime contractor, and the responsible insurance carrier with
overseas contracts, and that some contractors simply go without
insurance to lower their costs.185 In other words, keeping track
of contractors has simply confounded the Government.
Contractors’ failure to secure DBA insurance has been
further complicated by ambiguity in the DBA and associated
statutes. Generally, the language in the DBA is broad, covering
“any employee engaged in any employment . . . upon any public
182 Need citation183 Need citation184 H. COMM. ON OVERSIGHT AND GOV’T REFORM , supra note 14, at 2 House Hearing on Defense Base Act, supra note 14 (statement of Seth Harris, Deputy Sec’y, Dep’t of Labor).185 Id.
41
work in any Territory or possession outside the continental
United States . . . if such employee is engaged in employment at
such place under the contract of a contractor . . . with the
United States.”186 However, one clause in particular excludes
coverage to any contractor or subcontractor “who is engaged
exclusively in furnishing materials or supplies under his
contract.”187 Thise limitation serves multiple purposes. First,
it excludes manufacturers of goods used overseas.188 Second, it
removes some of the insurance risk by excluding contractors who
move in and out of the Area of Responsibility (AOR).189 Risk for
these workers may be difficult to determine since the amount of
time these contractors spend in the AOR, and the areas in which
they travel, might vary greatly depending on the contract.190
Further, depending on where they work, many of these manufacture
186 Defense Base Act, 42 U.S.C. § 1651(a)(3) (2006).187 Id.188 See Alan-Howard v. Todd Logistics, Inc., 21 BRBS 70 (1988). In this case, the Board held that the administrative assistant's claim for injury was cognizable under the Defense Base Act since the U.S. undertaking to aid in the construction of a military facility for Saudi Arabia qualified as the "public work" required for coverage under the DBA. Furthermore, the Defense Base Act exclusion from coverage of "any employee of . . . [(a]) contractor . . . who is engaged exclusively in furnishing materials or supplies under his contract" was held not to apply since the claimant's work as a facilitator under his employer's contract to provide "logistics management and support services" constituted a "service." Specifically, the Board viewed the pertinent exclusionary language as excluding manufacturers of goods used overseas from DBA coverage, rather than individuals who work on-site to facilitate the utilization of such goods.189 Need citation190 Need citation
42
or suppliers may not require DBA insurance.191 The exclusion
therefore reduces the overall cost of insurance for the
Government.
This exclusion of supply contractors, however, has created a
great deal of ambiguity. For example, a contractor might
manufacture materials or supplies in the United States but also
deliver the supplies to the AOR. Delivery of supplies to the AOR
might require employees to perform on-site services. The
contractor would seem to be exempt from DBA requirements as he is
“exclusively engaged in furnishing material and supplies.”192
However, employees making deliveries to the AOR or performing on-
site services might bring the contractor within the scope of the
statute. The nuances in the law are difficult enough for U.S.
contractors to comprehend, let alone less sophisticated second
and third-tier contractors who may have no familiarity with U.S.
law.
Further complicating the matter, DoD agencies seem to
disagree on when DBA insurance is required.193 In an effort to
191 Need citation192 Defense Base Act § 1651(a)(3).193 See U.S. Army Corps. Of Engineers, USACE Defense Base Act Insurance Program,Workers Compensation Insurance Program Rules and Regulations, U.S. Army, http://www.tam.usace.army.mil/Documents/IndustryDayDocs/Defense-Base-Act-Insurance.pdf (U.S. Army Corps of Engineers explicitly requires DBA insurance unless a waiver is obtained); But see Office of the Assistant Secretary of the ArmyU.S. ARMY , ARMY CONTRACTORS ACCOMPANYING THE FORCE GUIDEBOOK 18 (2003), available at http://www.alt.army.mil/portal/page/portal/oasaalt/documents/caf_
43
explain the exception to the clause, former Director for Defense
Procurement and Acquisition Policy, Deidre A. Lee, issued a
memorandum to the directors of the defense agencies, explicitly
stating that the DBA clause should be included in all DoD service
contracts performed (either entirely or in part) outside of the
United States, as well as in all supply contracts that also
require the performance of employee services overseas.194 The
authority Ms. Lee cited for this expansive reading of the DBA
rests on the broad definition of the term “public-work contract”
in FAR 28.305.195 The memorandum essentially dispenses with the
“service” versus “supply” distinction that the exemption language
in the statute seems to impose.196
A 2005 GAO report was critical of DoD’s confusing guidance
related to the applicability of DBA insurance.197 The GAO found
that some agencies believed DBA insurance waivers issued by the
DOL exempted contractors working in Iraq from carrying DBA
guidebook.doc (stating that DBA insurance “is available” in some instances).194 Memorandum from Deidre A. Lee, Director, Defense Procurement and Acquisition Policy, Office of the Under Secretary of Defense, to the Directors of the Defense Agencies, (Dec. 8, 2003), available at https://www.alt.army.mil/portal/page/portal/oasaalt/documents/dpap_memo_08dec03.pdf.195 FAR 28.305 (2011).196 Need citation (probably same as fn. 194)197 See U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-05-280R, DEFENSE BASE ACT INSURANCE: REVIEW NEEDED OF COST AND IMPLEMENTATION ISSUES 5 (2005), available at http://www.gao.gov.new.items/d05280r.pdf.
44
insurance.198 However, DOL officials confirmed that waivers do
not apply for contractors in Iraq because the country lacks its
own local workers’ compensation system.199 The report also raised
questions about what benefits would be provided when grant
workers purchase DBA insurance, since the DOL position is that
DBA requirements do not cover work performed under grants.200
Lastly, the report raised concerns over whether DBA insurance
would be required for mixed-funding contracts involving
appropriated funds of the United States and funds from foreign
governments.201
The DBA clause’s lack of clarity may have reduced the
Government’s willingness to impose sanctions on contractors
failing to secure DBA insurance. Refusal by DOL and Department
of Justice (DOJ) to enforce DBA laws has done nothing to raise
awareness of the importance of DBA insurance. Criminal and civil
penalties are available to the Government when contractors either
fail to obtain DBA insurance or do not comply with the DOL’s
administrative processing regulations.202 However, the Government
has no incentive to impose these sanctions and has only rarely
elected to do so. DOL may impose civil fines in the amount of
$10,000 against an employer, insurance carrier, or self-insured
198 Id.199 Need citation200 Need citation (probably same as fn. 197)201 Id.202 20 C.F.R. § 702.204 (2011).
45
employer who knowingly and willfully fails to notify the DOL when
an employee is injured and the injury causes the employee to miss
one or more shifts from work.203 Likewise, the DOL may impose
civil penalties for false statements made in reports submitted to
the DOL.204 However, between 2001 and 2009, the DOL fined only
five companies, even though DOL records showed at least 7,000
cases where companies had failed to report injuries.205 As of
June 2009, the DOL reported levying fines in only about 50 of the
36,000 cases processed by the two largest insurance companies.206
Criminal sanctions are also authorized under the LHWCA, yet
no one has ever been prosecuted. When violations warrant
criminal penalties, the DOL is required to forward any such cases
to the DOJ, which maintains prosecutorial discretion.207 The
LHWCA’s language is clear and expansive in terms of imposing
criminal penalties on companies and individual company
officers.208 The section states that employers failing to obtain
DBA insurance, when required, shall be guilty of a misdemeanor
and may be fined up to $10,000 and imprisoned for up to a year,
203 20 C.F.R. § 702.201 (2011).204 Need citation (likely same as above)205 See T. Christian Miller, Injured Abroad, Neglected at Home: Labor Dept Slow to Help War Zone Contractors, PROPUBLICA (Dec. 17, 2009), http://www.propublica.org/article/labor-dept-slow-to-enforce-defense-base-act-for-contractor-care-1217.206 Id.207 Id.208 Need citation (probably same as next)
46
or both.209 Additionally, the section provides that in cases
where such an employer is a corporation, the president,
secretary, and treasurer shall be severally liable for the
corporation’s failure to secure DBA insurance.210 In fact, the
statute provides that the president, secretary, and treasurer
shall be “severally personally liable, jointly with such
corporation, for any compensation or other benefit which may
accrue under the said Act in respect to any injury which may
occur to any employee of such corporation . . . .”211 Such broad
language suggests that Congress wanted to make sure contractor
employees were adequately covered under the DBA. Given these
consequences, one would expect contractors to be deterred from
failing to provide the insurance. However, in the nearly 85 year
history of the LHWCA, no one has ever been prosecuted.212
Even when contractors do secure DBA insurance, insurance
carriers still deny liability for many claims related to PTSD and
other serious injuries. There is no question the regulatory
scheme has been overburdened by a heightened reliance on
contractors.213 However, this excuse offers little justification
as to why mental health claims are delayed or denied. Critics of
209 Longshore and Harbor Workers’ Compensation Act, 33 U.S.C. §§ 938(a) (2006).210 Need citation (same as previous)211 Id.212 Miller, supra note 205.213 Need citation
47
the current DBA regulatory scheme argue that the DOL does not
have the necessary authority to properly oversee the compensation
system to correct these problems.214 Current statistics support
these claims.
The statistics for mental health DBA claims are dismal.
Three insurance carriers account for approximately 97% percent of
the DBA premiums paid by DoD.215 AIG accounts for approximately
75% percent, while CNA and ACE Group account for approximately
15%fourteen percent and 1%one percent, respectively.216 DOL has
reported that only about eight percent of claims are contested.217
However, these numbers are somewhat misleading. Chris Winans, a
spokesman for AIG, said his company pays about half of the claims
involving PTSD.218 A joint investigation by the Los Angeles
Times, ABC News, and ProPublica found that when injuries resulted
in more than four days of lost work, insurance carriers also paid
claims in only about half the cases.219 Thus, it seems claims for
de minimis reimbursements are granted, while complex claims are
denied.
214 Need citation215 Need citation (probably same as next)216 DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 28.217 Need citation (probably same as above)218 James Risen, After Iraq, Contracts Face Mental Health Issues, N.Y. TIMES (Jul. 4, 2007), http://www.nytimes.com/2007/07/04/health/psychology/04cnd-contractors.html?ex=1341201600&en=a8eb0797c95e5b5b&ei=5088&partner=rssnyt&emc=rss.219 See Miller, supra note 149.
48
The media has helped raise awareness about the denial of
mental health claims.220 However, because insurance carriers
rarely confront significant consequences for such denials, an
exorbitant number of injured contractors must challenge their
carriers’ refusal to pay their claims.221 The hardship imposed on
contractors when their claims are denied is an important part of
the debate surrounding DBA insurance.222 Any alternative for a
220 The investigation by the Los Angeles Times, ABC News, and ProPublica highlighted the accounts of three contractors, Alice Davis, John Mancini, and Tim Eysselinck, who were denied reimbursement for mental health treatment. Alice Davis was hired by DynCorp International to train police officers in Iraq. As a result of her exposure to dead bodies, children without limbs, and life threatening situations, Ms. Davis developed seizures. DynCorp recommended she seek mental health treatment, but their insurance carrier refused to reimburse her treatment. John Mancini was hit by an SUV on his way home from Kuwait City. His employer had failed to secure DBA insurance. Mr. Mancini sought reimbursement for his medical bills for two years through DOL, without success. On October 6, 2006, Mr. Mancini was arrested after making several calls to the police and shooting a gun at officers when they arrived at his house. He was sentenced to ten years in an Arizona mental hospital, followed by treatment through the Arizona correctional system. Lastly, Tim Eysselinck, a 44 year-old contractor employee for RONCO Consulting Corporation (RONCO), was hired to provide land mine and explosive ordinance removal services. On April 21, 2004, Tim Eysselinck shot himself while on leave with his wife and daughter in Africa after celebrating his 40th birthday. His employer denied the family’s DBA claim, stating that Mr. Eysselinck’s suicide was unrelated to his de-mining duties in Iraq. See Russell Goldman, How Iraq Contractors Deal With Trauma, ABC NEWS (Oct. 3, 2007), http://abcnews.go.com/US/story?id=3679866&page=1; See also T. Christian Miller, supra note 205; See also Max Pizarro, One Widow’s Drive to End the War, CLATL.COM (Jan. 24, 1007), http://clatl.com/atlanta/one-widows-drive-to-end-the-war/Content?oid=1265285.221 Need citation222 Need citation
49
new acquisition strategy must provide DOL with more oversight
authority, otherwise insurance carriers will continue to exploit
injured contractors.
III. Developing a New Acquisition Strategy
A. Policy Changes Could Alleviate Existing Problems
The acquisition process must be reformed. But before making
any statutory changes, Congress should consider whether policy
changes would alleviate its cost concerns. Three particular
policy considerations should be addressed. First, DoD should
consider the benefits associated with paying a reasonable amount
of money for DBA insurance. Second, if the cost associated with
maintaining a healthy contactor workforce is too high, Congress
should consider whether civilian contractors should be working in
war zones at all. Third, if contractors are needed in war zones,
enforcement of existing regulations should be considered to
reduce the cost of DBA insurance.
Insuring contractors in war zones is costly.223 Although
Congress wants to reduce the cost of DBA insurance, it must
consider that paying too little for insurance might circumvent a
number of important goals. First, the quality of service
provided by insurance carriers is already reaching unacceptable
levels for mental health claims.224 Reducing costs before these 223 Need citation224 Need citation
50
issues are resolved will only exacerbate the problems. Second,
the law requires contractors to provide for the health and safety
of its employees at the work site.225 Since the Government
reimburses contractors for insurance premiums, it is reasonable
that the Government should be concerned with benefits
distribution. If insurance companies are denying claims and
reaping excessive profits, then the Government is complicit in
circumventing the DBA. Third, the Government must provide for a
safe working environment to keep contractors from straying from
the Government’s objectives. Like insurance carriers, contractor
employees are agents of the Government. If employees are not
receiving reimbursement for care, their families’ financial
security is at risk.226 A contractor in this position will always
put his or her own objectives over the objectives of the
Government. Thus, before any cheaper means of securing DBA
benefits is implemented, Congress must realize that DBA insurance
is costly and that paying less for insurance is not necessarily
in the best interest of the Government.
If cost is Congress’s primary concern, as the NDAA for 2009
seems to suggest, then the Government should consider relying
less on civilians in war zones. Simply stated, the Government
should not send civilians to war zones if they are not willing to
pay the costs associated withcosts of ensuring their safety. No 225 Need citation226 Need citation
51
matter what acquisition strategy is used, the cost of insuring
against risk to contractors in war zones will be costly. If
Congress has decided the United States can no longer afford these
costs, then perhaps the work should be left to the U.S. military.
Ordinarily, the Government would use its military to perform
hazardous tasks. However, because of the personnel limits
imposed by Congress, much of the risk of performing services and
construction in war zones has been allocated to contractors.227
It is simply not acceptable that Congress take any action that
threatens the safety of contractors after they have borne the
responsibilities DoD has placed on them. Ill-equipping the
warfighter because of cost concerns should never be an acceptable
solution, regardless of whether the warfighter is enlisted,
commissioned or under contract with the U.S. Government.
Lastly, a new acquisition strategy will not necessarily
alleviate existing problems or decrease costs unless current
regulations are enforced. Better enforcement of existing
regulations is a low-cost solution, which requires no
implementation. Criminal penalties are already available under
the LHWCA if contractors fail to secure DBA insurance.228
Further, DOL has the authority to levy fines when contractors are
227 Need citation228 Longshore and Harbor Workers’ Compensation Act, 33 U.S.C. §§ 938(a) (2006).
52
found not in compliance229 and DOJ has the authority to prosecute
and imprison delinquent contractors.230 Although these remedies
are available, few fines have ever been assessed and no one has
ever been prosecuted for failing to carry DBA insurance.231 If
the Government used these remedies, it would at least improve
contractor compliance with the law, and perhaps send a stronger
message regarding the importance of DBA insurance.
Another mechanism already in place that could be used to
monitor DBA compliance is the CO’s responsibility determination.
The FAR mandates that no contract shall be awarded unless the CO
makes an affirmative determination of responsibility.232 While
these determinations typically involve a contractor’s financial
stability, the clause states that contractors must be “otherwise
qualified and eligible to receive an award.”233 Since failing to
secure DBA insurance carries criminal penalties, it would seem
the clause is broad enough to allow COs to find contractors not
responsible when they fail to secure DBA insurance.
Given the broad language of the clause, it also seems
reasonable that the responsibility determination could be used to
ensure contractor employees are physically capable of performing
229 20 C.F.R. § 702.201 (2011).230 Longshore and Harbor Workers’ Compensation Act, 33 U.S.C. §§ 938(a) (2006).231 Miller, supra note 205.232 FAR 9.103(b) (2011).233 FAR 9.104-1(g) (2011).
53
contract requirements. The military imposes rigorous physical
standards.234 It makes sense that their civilian counterparts,
who often work closely with the military, are also physically
prepared for the operational hazards of their jobs. Requiring
contractors to maintain fitness standards could provide a number
of advantages to insurance carriers and the Government. First,
with a healthier pool of claimants, the number of claims, as well
as the cost of each claim, might be reduced. Second, liability
might be clearer with claimants that have fewer pre-existing
conditions, thus reducing litigation costs. Overall, requiring
contractors to provide employees that are physically capable of
performing their jobs would likely make insuring these workers
less risky and less costly.
Although enforcement of existing regulations would improve
efficiency, the breadth of these remedies is somewhat limited.
The Government may only impose sanctions or penalties authorized
under the DBA and associated statutes.235 While the sanctions are
significant, they are limited to compliance failures — situations
in which the contractor failed to obtain insurance.236 The
sanctions do not directly address cost and performance
concerns.237 Further, because the Government has no privity of
234 Need citation235 Need citation236 Need citation237 Need citation
54
contract with insurance carriers, its remedies against carrier
malfeasance are limited to those provided by the statute.
Employers may seek remedies for breach of contract against
insurance carriers when their employees’ claims are denied, but
they have no incentive to do so. Therefore, without action from
either the Government or the employer, claimants are left seeking
mostly procedural remedies against insurance carriers on their
own.
In summary, DoD must accept that there are costs associated
with keeping contractors safe overseas. If the cost is too high,
then perhaps civilians should be withdrawn from the front lines.
If contractors are needed in war zones, then the Government
should make a more valiant effort to enforce current regulations.
While a new acquisition strategy is needed, enforcement of
current regulations will improve efficiency, provide better care
for contractors, and may even slow the rising number of
contractor casualties.
B. Single-Provider Insurance Versus Open-Market Insurance: A 40 Year Debate
The Government has been pursuing DBA insurance reform since
the 1970’s, when the Government Accountability Office (GAO)
released two reports expressing their concern over the cost and
implementation of DBA insurance.238 Since that time, the debate 238 U.S. GOV’T ACCOUNTABILITY OFFICE, B-172699, OPPORTUNITY FOR SAVINGS IN PROVIDING WAR RISK INSURANCE FOR CONTRACTOR PROPERTY AND EMPLOYEES (1971), available at http://archive.gao.gov/f0302/095484.pdf; See also
55
has mainly focused on whether DoD would realize greater cost
savings by implementing a single-insurer program, such as the
Department of State (DOS) and the U.S. Agency for International
Development (USAID) programs,239 or through improvements to the
current open-market program. In 1996, DoD completed a
congressionally mandated study, similar to DoD’s most recent DBA
report to Congress, on the issue of implementing a single-
provider program to provide DBA insurance for all DoD
contracts.240 At the time, DoD concluded that a single-provider
program would not yield greater cost savings.241 The Government
rested on those findings until 2005 when smaller federal
agencies, such as DOS and USAID, began realizing cost savings
using single-provider programs. The debate between Congress and
DoD over a DBA acquisition strategy subsequently intensified.
In 2005, GAO performed a comprehensive study of DBA
insurance and found that DOS and USAID were realizing cost
savings through fixed insurance rates under single-provider
contracts.242 At the same time, the cost of DBA insurance on the
U.S. GOV’T ACCOUNTABILITY OFFICE, B-162408, AID NEEDS CLARIFICATION ON DEFENSE BASE ACT INSURANCE REQUIREMENTS (1980), available at http://archive.gao.gov/f0202/113660.pdf.239 DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 7.240 See U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-05-280R, DEFENSE BASE ACT INSURANCE: REVIEW NEEDED OF COST AND IMPLEMENTATION ISSUES 4 (2005), available at http://www.gao.gov.new.items/d05280r.pdf.241 Id.242 Id.
56
open -market was steadily rising and DoD was experiencing
unprecedented cost increases.243 In April 2005, in response to
requests from over 100 members of Congress, the GAO issued a
report on rising costs and other problems associated with DBA
insurance.244 The crux of the report was whether greater savings
could be obtained from a single-provider or an open-market
provider.245 GAO found that contractors working for DOS and USAID
paid insurance premiums between $2 and $5 for every $100 of
salary cost for DBA insurance, regardless of where the contract
was performed.246 In contrast, DoD insurance premiums were
between $10 and $21 of salary cost for contracts performed in
Iraq.247 GAO concluded that while singe-provider programs
appeared to be more cost efficient, further information was
needed to determine whether DoD could achieve the same rates and
savings as DOS and USAID for the locations in which it
operates.248
GAO also cited multiple problems with DoD’s administration
of DBA insurance, preventing a conclusion as to whether a single-
243 Need citation244 Id.245 Id.246 DBA insurance costs are typically compared in terms of dollars per $100 of payroll cost.247 See U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-05-280R, DEFENSE BASE ACT INSURANCE: REVIEW NEEDED OF COST AND IMPLEMENTATION ISSUES 4 (2005), available at http://www.gao.gov.new.items/d05280r.pdf. The GAO contacted eight prime contractors who reported these rates.248 Need citation (probably same as previous)
57
provider strategy would result in costs similar to those
experienced by DOS and USAID.249 GAO found that DoD experienced
problems with: (1) determining when DBA insurance applies, (2)
providing adequate and accurate information to companies and
workers, (3) monitoring contractor compliance with DBA
requirements, (4) claims processing, and (5) handling the
increased claims volume.250 GAO concluded that an informed
decision about a procurement strategy for DBA insurance could not
be made until these challenges were corrected.251 Further, GAO
recommended a joint study by DoD, the Office of Management and
Budget (OMB), DOL, DOS, and USAID to gather as much data as
possible on DBA insurance and to determine which acquisition
strategy would be most effective across the agencies.252
DoD and OMB both objected to the recommendation. OMB
believed that efforts to rectify the problems were already in
place.253 They cited the formation of an interagency working
group, DOL seminars on DBA insurance, a proposed rule by DOS
regarding DBA insurance waivers, and an on-going single-provider
pilot-program to test the efficiency of single-provider insurance
for DoD.254 OMB also stated that GAO’s recommendation was too
249 Need citation (probably same as previous)250 Id.251 Need citation (probably same)252 Id. at 5.253 Need citation (probably same)254 Id at 9.
58
broad, and that a “targeted approach to DBA issues would be
preferable . . . .”255
DoD’s response was that the cost of such a study would
outweigh any potential benefits.256 The cost of DBA data
collection and reporting would be expensive and divert already
limited resources, with no clear benefit for the procurement
process.257 DoD recommended waiting to see if the working group,
seminars, conferences, and pilot-program could achieve their
desired results before undertaking any further studies.258
Despite DoD’s reluctance, Congress directed DoD to examine
reform strategies for DBA insurance in its National Defense
Authorization Act for Fiscal Year 2006.259 Two years later, DoD
still had not acted on Congress’s request.260 During a May 2008
House Oversight and Government Reform Committee hearing, the
Committee railed against Admiral Richard Ginman (Ret. U.S. Navy),
Deputy Director for Contingency Contracting and Acquisition
Policy, for not being able to provide answers to simple and
germane questions.261 The Committee had asked: How many
255 Id.256 Id. at 10.257 Id.258 Id.259 See National Defense Authorization Act, Pub. L. No. 109-163, 119 Stat. 3136 (codified as amended in scattered sections of 10 U.S.C.).260 Need citation261 See H. Comm. on Oversight and Gov’t Reform, 110th Cong., supra note 145, at 91.
59
contractors and subcontractors are in Iraq?262 How much does DoD
pay to insure them?263 Do all contractors in Iraq require DBA
insurance?264 How are insurance rates determined? How much do
contractors pay for DBA insurance?265 Surprisingly, Admiral
Ginman had no response to any of these questions.
The Committee also asked why DoD had not reported on the
success or failure of the U.S. Army Corps of Engineers (USACE)
single-provider pilot-program.266 In 2005, DoD had implemented a
single-provider pilot program for USACE to test the possibility
of using a single DBA insurance provider for all DoD contracts.267
In October 2008, after initial cost savings of $19 million, the
program was expanded to include contracts issued by the Joint
Contracting Command-Iraq/Afghanistan (JCC-IA).268 During the
House Committee hearing, Congressman Jim Cooper269 asked why DoD
had not reported on the success of the program.270 Admiral Ginman
stated that DoD had incomplete data on the program because it had
been expanded for use by the JCC-IA.271 The Committee could not
262 Need citation (probably same as previous)263 Need citation (probably same as previous)264 Need citation (probably same as previous)265 Id at 100.266 Need citation (probably same)267 Need citation268 DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 7.269 Congressman Cooper (Democrat, Tennessee) has served from 2003 to the present.270 Need citation (probably same as next)271 Need citation (probably same as next)
60
understand why, after preliminary data had shown a cost savings
of $19 million, DoD had not reported on the program or moved to
adopt the acquisition strategy for DoD.272
In contrast to the success of the pilot-program, the House
Committee also addressed allegations regarding abuses under DoD’s
open-market system.273 The Committee focused its questioning on
the Army’s Logistics Civil Augmentation Program III (LOGCAP
III).274 LOGCAP III was an immensely large Army contract
performed exclusively by KBR.275 KBR had secured DBA insurance
from AIG under DoD’s open-market system.276 When the KBR contract
came under the scrutiny of the U.S. Army Audit Agency (USAAA),
USAAA found that KBR was paying “substantially more” in premiums
than AIG was expected to pay in claims.277 Like most contracts
requiring DBA insurance, KBR’s premiums were reimbursable under
the cost-type contract.278 Army auditors found that $284.3
million in DBA premiums was paid under the LOGCAP III contract
between 2003 and 2005, but only $73.1 million was paid in DBA
272 See H. Comm. on Oversight and Gov’t Reform, 110th Cong., supra note 145 at 92.273 Need citation (probably same as previous)274 Need citation (probably same as previous)275 Need citation (probably same as previous)276 Need citation (probably same as next)277 VALERIE B. GRASSO, BAIRD WEBEL, & SCOTT SZYMENDERA, CONG. RESEARCH SERV., RL34670, THE DEFENSE BASE ACT: THE FEDERALLY MANDATED WORKERS’ COMPENSATION SYSTEM FOR OVERSEAS GOVERNMENT CONTRACTORS 18 (2010), available at http://www.fas.org/sgp/crs/natsec/RL34670.pdf.278 Need citation (probably same as previous)
61
claims for that period.279 Senator Waxman noted that between 2002
and 2007, the top four DBA insurers, which provided for 99%
percent of the DBA insurance at that time, collected $1.5 billion
in premiums and were expected to pay out an estimated $928
million in claims and expenses.280 He noted that the 39% percent
profit margin yielded an expected underwriting gain of $585
million for the four carriers.281
Weary of DoD’s inaction, Congress eventually mandated that
DoD adopt a new DBA acquisition strategy in 2008.282 Section 843
of the NDAA for 2009 requires DoD to adopt a strategy thatwhich
would minimize costs to DoD and defense contractors.283
Unfortunately, it was not until after the passage of the Act that
Congress formally addressed claims processing concerns and denial
of claims allegations during a House Oversight and Government
Reform Committee meeting in June 2009.284 Perhaps this explains
why the NDAA for 2009 makes no mention of performance or claims
processing standards and focuses entirely on minimizing costs to
the Government and defense contractors. In any case, the House
279 Id.280 See H. Comm. on Oversight and Gov’t Reform, 110th Cong., supra note 145, at 89.281 Id.282 Need citation283 See Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, Pub. L. No. 110-417 §843, 122 Stat. 4540 (2008).42 U.S.C. § 1655 (2008).284 Need citation (same as fn. 14?) See House Hearing on Defense Base Act, supra note 14.
62
Committee finally addressed allegations that insurance companies
were improperly denying claims at the June 2009 hearing.285 In
addition to testimony from wounded contractor veterans, Vice
President Major General George R. Fay (Ret. U.S. Army Reserve), a
CNA Executive, and Mr. Gary Pitts, an attorney representing
thousands of injured contractors, also provided testimony.286
Several of the witnesses’ recommendations were included as
possible acquisition strategies in DoD’s 2009 report to Congress,
however none of the recommendations were ultimately supported by
DoD.287
IV. Acquisition Strategies
A. Maintaining the Current Open-Market System
Complying with the NDAA for 2009 mandate, DoD submitted a
report to Congress in September 2009 on reform strategies for DBA
insurance.288 The purpose of the report was to communicate to
Congress an acquisition strategy which would minimize costs to
the Government and defense contractors.289 Presumably, the report
was to include feedback to Congress on the USACE single-provider
test-pilot program. Since the 2008 House Committee hearings,
285 Need citation (same as previous)Id.286 Need citation (same)Id.287 Need citation (same) See DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 13.288 Need citation (same as fn. 40?)289 Need citation (same)
63
Congress had been awaiting DoD’s recommendation regarding whether
the USACE program could be implemented DoD-wide.290 While DoD had
asked USAAA to conduct a formal audit of the USACE program prior
to the 2008 House Committee hearings,291 USAAA did not complete
the audit until August 2010, after DoD submitted its report.292
Without the Army audit, DoD collected and presented its own
data from industry and various Government agencies.293 They
presented four basic alternative acquisition systems to Congress:
(1) a single-provider system, (2) a multiple-provider system, (3)
an open-market system with improvements, and (4) a government
self-insurance system.294 Private industry clearly favored the
current open-market strategy.295 Industry comments expressed the
belief that a single-provider system would not achieve the cost
savings experienced by USACE.296 DoD agreed, making its final
recommendation to continue the current open-market strategy, with
the addition of some improvements to the system.297 While DoD
290 Need citation (same)291 See H. Comm. on Oversight and Gov’t Reform, 110th Cong., supra note 145, at 40 (statement of Richard Ginman, Deputy Director of Contingency Contracting and Acquisition Policy).292 Most USAAA audit reports are available on USAAA’s website, http://www.hqda.army.mil/aaaweb/, however the USACE pilot-program audit has not been made available as of the date of this article.293 See DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 11 (DoD collected data from private industry, including brokers, insurers, and government contractors, as well as government agencies).294 Need citation (likely same as above)295 Id. at 17.296 Need citation (likely same as above)297 Need citation (likely same as above)
64
evaluated the government self-insurance option favorably, it
concluded self-insurance was not a workable alternative because
DoD and DOL lacked the statutory authority or resources to
undertake its implementation.298
Unfortunately, making minor changes to the current open-
market strategy will not reduce costs or result in more equitable
claims processing. The current system, even with the
modifications suggested by DoD, will continue to result in
excessive premiums for contractors and the Government and
processing problems for injured contractors. Instead, the
solution thatwhich offers the most cost savings and provides
critical monitoring and bonding299 of insurance carriers is a
multiple-provider system. A brief analysis of each of the four
alternatives is presented below, including a discussion of why a
multiple-provider system is the optimum solution for all
stakeholders, including insurance carriers.
298 Id. at 57.299 See Chris R. Yukins, A Versatile Prism: Assessing Procurement Law Through The Principal-Agent Model, 40 Pub. Cont. L.J. 63 (2010). Professor Yukins has used the terms monitoring and bonding to describe principle-agent relationships in the context of government contracts. Monitoring is essentially oversight by a principal used to eliminate an agent’s diversions from the principal’s objectives. Bonding is the use of contractual self-constraints, such as internal policies, practices, or procedures, designed to reduce diversions. In the context of DBA insurance, the Government’s objective is to improve reimbursement services to injured contractors and decrease costs. Achieving this goal is dependent upon the Government’s ability to effectively monitor and bond insurance carriers through its contractual relationship with insurance carriers.
65
B. Single-Provider System: An Impracticable Alternative
A number of government agencies have had success with
single-provider insurance in the last decade. DOS, USAID, and
USACE have all benefited from switching from an open-market
system — which requires contractors to obtain DBA insurance
independently — to a single-provider system, in which one
insurance company contracts with a government agency to provide
all DBA insurance.300 In the early 1990’s, an investigation by
the DOS Inspector General (IG) found that costs could be saved if
DOS transitioned to a single-provider system.301 Since that time,
DOS has competitively awarded DBA insurance contracts to a single
carrier.302 USAID, and to some extent USACE, have had similar
success with this strategy.
A single-payer system for DoD, however, is an impracticable
option for several reasons. First, single-provider insurance
would not meet Congress’s requirement to maintain a competitive
DBA insurance market. In its mandate to DoD, Congress listed a
number of factors that it considered essential to the adoption of
a new strategy, including providing a competitive marketplace for
insurance to the maximum extent practicable.303 Although single-
300 See section xxxxx supra.301 See U.S. GOV’T ACCOUNTABILITY OFFICE, supra note 197, at 5.302 DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 7.303 Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, Pub. L. No. 110-417 §843 (b)(5), 122 Stat. 4540 (2008).42 U.S.C. § 1655(b)(5) (2008).
66
provider insurance would be competitively awarded, all DoD’s
business would go to one provider. Thus, Congress would never
seriously consider such a system.
Second, no one insurance carrier has the infrastructure to
support an organization the size of DoD. While carriers have
insured large government agencies in the past, DoD is unique.
DoD has approximately 2.1 million military and civilian
employees,304 compared to DOS’s 60,000 employees305 and USAID’s
2,200 employees.306 In addition to the Armed Forces, DoD includes
the Defense Commissary Agency, Defense Financing and Accounting
Service, Defense Logistics Agency, and the Defense Information
Systems Agency, among other agencies.307 Based on its enormity,
it is unlikely that any one carrier has the administrative and
financial resources to be DoD’s sole insurance provider.
Third, the risks associated with providing DBA insurance to
an organization with DoD’s mission is not likely to be borne by
one insurance carrier. While DOS and USAID conduct missions all
over the world, neither of those departments houses the Armed
Forces. The risks associated with insuring military contractors
304 U.S. DEPARTMENT OF DEFENSE, http://www.defense.gov/about (last visited Jul. 12, 2011).305 U.S. DEPARTMENT OF STATE, http://careers.state.gov/learn/what-we-do/mission (last visited Jul. 12, 2011).306 Ken Dilanian, Short-Staffed USAID Tries to Keep Pace, USA TODAY (Feb. 1, 2009), http://www.usatoday.com/news/washington/2009-02-01-aid-inside_N.htm.307 U.S. DEPARTMENT OF DEFENSE, http://www.defense.gov/about (last visited Jul. 12, 2011).
67
are higher than those associated with supporting DOS and USAID.308
Carriers have collected more claims data in the last decade,
however they remain wary of the DBA insurance market.309 In DoD’s
report to Congress, carriers were obviously reticent regarding
whether they would compete for a single-provider contract.310 DoD
reported that “one of the largest DBA carriers . . . would
entertain the possibility of bidding on a single-provider
contract.”311 Two other insurance carriers indicated that they
would not compete.312
Recent competition for DBA contracts has attracted fewer
insurance carriers than in the past. After initial success with
an award to CIGNA Property and Casualty Insurance (CIGNA) in
1991, DOS solicited a similar follow-on multi-year contract in
2000.313 Four insurance carriers submitted proposals, including
CIGNA, AIU, Ace International, and CNA.314 CNA was eventually
awarded the contract.315 However, in 2008, when both DOS and
308 Need citation309 Need citation. DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 4-5. (listing problems related to the DBA insurance market in comparison with stateside workers compensation)310 Need citation (likely same as next)311 DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 17.312 Id.313 Need citation. Congressional Research Service, The Defense Base Act: The Federally Mandated Workers’ Compensation System for Overseas Government Contractors, at 12 (2010) (available at http://www.fas.org/sgp/crs/natsec/RL34670.pdf).314 Need citation (likely same as previous). Id.315 Need citation (likely same as previous). Id.
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USAID issued solicitations for a single-provider of DBA
insurance, the only company to submit an offer was CNA.316
Likewise, in 2005, the DoD-sponsored pilot program for USACE
received only one offer, also from CNA.317 Thus, it is seriously
questionable whether competition for a single-provider contract
would attract enough competition to satisfy Congress.
C. Multiple-Provider System: Taking Control of DBA Insurance
During the House Committee hearings in June 2008, the
Committee heard testimony from the executive vice-president of
CNA, General Fay.318 CNA had been the sole insurance provider for
DOS since 2001 and for USAID since 2005.319 Based on his
experience in public service and as vice-president of CNA,
General Fay recommended DoD adopt, with modifications, a single-
provider program similar to those utilized by DOS and USAID.320
To compensate for the problems associated with insuring an
organization of DoD’s size, he recommended separating DoD into
316 Id. at 7.317 U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-05-280R, DEFENSE BASE ACT INSURANCE: REVIEW NEEDED OF COST AND IMPLEMENTATION ISSUES 15 (2005), available at http://www.gao.gov.new.items/d05280r.pdf.318 Need citation (likely same as fn. 320) House Hearing on Defense Base Act, supra note 14.319 Need citation (likely same as fn. 320) Id.320 See After Injury, the Battle Begins: Evaluating Workers’ Compensation for Civilian Contractors in War Zones: Hearing Before the H. Comm. on Oversight and Gov’t Reform, 111th Cong. (2009), available at http://www.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_house_hearings&docid=f:65546.pdfId. (statement of General George Fay, Executive Vice-President of CNA).
69
divisions, each with its own single-provider of DBA insurance.321
By dividing DoD by department or agency groupings, divisions
could be created that are small enough to be homogenous and
supportable by a single-provider yet large enough to diversify
the volatility of risks.322 This network of multiple providers
offers a number of advantages to industry and government.
1. Privity of Contract
A multiple-provider system would create privity of contract
between insurance carriers and the Government, giving the
Government greater control over the DBA insurance process. The
current system can too easily be manipulated to the detriment of
claimants and the Government. Because contractors secure DBA
insurance on the open -market, privity of contract exists only
between contractors and insurance carriers. Contractors have
little incentive to negotiate for more competitive rates because
ultimately their costs are reimbursed by the Government.323
Furthermore, the Government cannot effectively monitor claims
processing due to itstheir lack of authority over the claims
process. While DOL provides some monitoring function in the
dispute process, they have no authority to override decisions of
321 Need citation (likely same)Id.322 Id.323 Need citation. See Congressional Research Service, The Defense Base Act: The Federally Mandated Workers’ Compensation System for Overseas Government Contractors, at 15 (2010) (available at http://www.fas.org/sgp/crs/natsec/RL34670.pdf).
70
insurance carriers.324 Thus, when disputes arise between
claimants and carriers, the outcome is fortuitous. Claimants
receive no assistance from their employers because their employer
is either disputing the claim itselfthemselves or is not
interested in challenging the insurance carrier.325 Only after
the case winds its way through the administrative dispute
labyrinth can claimants obtain relief.326 In other words, the
current open-market system has a high potential for abuse and
offers few remedies when cost or performance problems arise with
insurance carriers.
On the other hand, if privity of contract existed between
insurance carriers and government agencies, the Government would
be afforded advantages in both contract formation and
performance. During contract formation, competition among
offerors would keep premium rates down, as would effective
negotiating by government agencies.327 But even more importantly,
324 Need citation. Id. at 10.325 Need citation326 Need citation. See Congressional Research Service, The Defense Base Act: The Federally Mandated Workers’ Compensation System for Overseas Government Contractors, at 10 (2010) (describing the three step formal appeals process as well as the optional informal resolution process) (available at http://www.fas.org/sgp/crs/natsec/RL34670.pdf).327 Need citation. See After Injury, the Battle Begins: Evaluating Workers’ Compensation for Civilian Contractors in War Zones: Hearing Before the H. Comm. on Oversight and Gov’t Reform, 111th Cong. (2009), at 138, (statement of General George Fay, Executive Vice-President of CAN), available at http://www.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_house_hearings&docid=f:65546.pdf
71
government agencies would have discretion to award contracts
based on past performance and customer satisfaction metrics.328
This could be a tremendous boon for claimants, whose fate has
thus far been dependent on the sophistication and vigilance of
their employers in securing quality insurance. Finally, by
directly contracting with insurance carriers, COs could make
responsibility determinations based on whether carriers have in
fact obtained DBA insurance, a potentially potent preventative
mechanism.
While the contract formation process would allow the
Government to achieve cost and quality assurance objectives, the
monitoring and bonding inherent in the performance of government
contracts would ensure fulfillment of carriers’ obligations. For
example, privity of contract would entitle the Government to all
the remedy granting clauses available under the FAR.329 Thus,
insurance carriers would always have an incentive to properly pay
claims to avoid default.330 If the insurance carrier was
improperly denying claims, the contracting officer could not only
have the option of defaulting the contractor for failure to
perform331 but could also document the carrier’s poor performance
in the Federal Awardee Performance and Integrity Information
328 Need citation329 FAR 49.402-2 (2011).330 Id. See also FAR 249-8 (2011).331 FAR 249-8(a)(1)(i) (2011).
72
System (FAPIIS), a Government database which tracks companies’
past performance.332 These negative performance reports could
have serious consequences regarding a contractor’s future
opportunities with the U.S. Government. In summary, a multiple
provider system would give the Government greater control over
the claims process by providing remedies to keep insurance
carriers aligned with government objectives. Unlike DOL’s
dispute process, this system has the capability to correct
inefficiencies and avoid abuses that exploit injured contractors.
2. Potential for Cost Savings
There is general disagreement among stakeholders, including
DoD, the insurance industry, and contractors regarding the
potential for cost savings under any of the alternatives. DOS,
USAID, and USACE have all adopted the single-provider system and
have experienced cost savings.333 While DoD is too large for a
single-provider system, the multiple-provider system offers many
of the same features. There are two clear cost advantages if DoD
implements a multiple-provider system. First, a multiple-
provider system would not require minimum premium payments that
contractors are required to pay under an open-market system.334
Under an open-market system, insurance premiums are paid as a
332 See FEDERAL AWARDEE PERFORMANCE AND INTEGRITY INFORMATION SYSTEM, https://fapiis.ppirs.gov/ (last visited Jan. 14, 2012)..333 See supra section xxxxx.334 Need citation (possibly same as next)
73
percentage of total payroll, such as $10 per $100 of payroll.335
However, insurance carriers sometimes require contractors with
limited employees or limited payrolls to make minimum premium
payments in addition to, or instead of, a percentage of their
payroll.336 While this may not sound like a significant amount of
money, the House Oversight and Government Reform Committee found
47 contractors that paid more in insurance premiums than they
paid in salaries.337
Second, the Government would have some control over premium
rates through the negotiated procurement process. Rates are
currently negotiated between contractors and insurance carriers,
usually with the assistance of a broker.338 The Government
reimburses contractors under cost-type contracts regardless of
how much carriers charge, so there is no incentive for brokers to
negotiate lower rates.339 Overall, a multiple-provider system
would allow the Government to curb excess costs in the system,
such as eliminating minimum premium charges, and maintain control
335 Need citation (possibly same as next)336 See Memorandum from the Majority Staff, H. Comm. on Oversight and Gov’t Reform, 110th Cong., to Members of the H. Comm. on Oversight and Gov’t Reform, 110th Cong., (May 15, 2008), available at http://abcnews.go.com/images/Blotter/DBA%20hearing%20_%2020080515102024.pdf.337 Id. Since 2002, over 700 contractors have been required to make minimum premium payments amounting to about $8.5 million.338 Need citation339 Need citation
74
over the rates carriers charge through the use of more aggressive
negotiating tactics.
3. Competition
One final advantage that is integral to the multiple-
provider system is the guarantee of DBA insurance for all
contractors. In the current open-market system, fledgling
contractors are often unable to secure DBA insurance due to their
risk.340 Thus, they are not able to compete for government
contracts, reducing overall competition in the procurement
process. A multiple-provider system manages risky contractors
through risk “pooling.”341 Pooling allows an insurer to pool the
risks of multiple contractors so that risks can be spread across
all contractors in the pool.342 This system results in lower
premiums and allows all contractors to obtain DBA insurance
regardless of their risk.343 Under an open-market system, since
contractors obtain insurance individually, the benefits of risk
pooling are not as direct.
The multiple-provider solution therefore offers enhancements
far superior to the current DBA strategy. Nevertheless,
additional components, beyond monitoring and bonding, are
340 Need citation341 See ROBERT E. KEETON & ALAN I. WIDISS, INSURANCE LAW §1.3 (West, 1988).342 Need citation (possibly same as previous)343 Need citation (possibly same as previous)
75
necessary to crystalize protections for contractor veterans
returning from war.
4. Additional Protections for Contractors
The multiple provider system allows the Government to
properly monitor and bond insurance carriers during contract
formation and contract performance. Such controls will result in
reasonable premium rates and proper claims processing. However,
three additional components must be implemented to specifically
target the denial of complex claims, a problem thatwhich has
scourged the system. First, DOL district directors should have
the authority to issue binding decisions during the informal
dispute resolution process. Second, the Government must self-
insure against the risk of PTSD and TBI. Third, the 14fourteen-
day rule for payment of claims should be extended to allow
insurance carriers adequate time to investigate complex claims.
Many of the problems experienced by injured contractors are
a result of financial hardships imposed on claimants when their
claims are denied and delayed during the dispute process.344
However, a subtle change in the allocation of risk between
contractors and insurance carriers would eliminate this problem.
Presently, district directors can only make non-binding
recommendations to the parties.345 Naturally, when carriers
344 Need citation345 Need citation
76
receive an adverse recommendation, they simply ignore it.346
Thus, the process expends the time and resources of the
Government, claimants, and insurance carriers without bringing
any resolution to the case.
In contrast, allowing district directors to make binding
decisions brings greater equity and efficiency to the process
without sacrificing the rights of the parties to appeal their
case to OWCP administrative law judges. Industry experts have
admitted that carriers are denying claims simply to gain more
time to investigate.347 Binding decisions would help reduce the
misuse of the system and eliminate prolonged appeals meant to
delay the decision-making process.348
A second critical tool to protect contractors suffering from
mental illness is Government self-insurance for PTSD and TBI
cases. On June 18, 2009, the House Oversight and Government
Reform Committee held a hearing to address their concerns about
PTSD and TBI.349 Mr. Gary Pitts, an attorney for PTSD and TBI
346 Need citation347 See H. Comm. on Oversight and Gov’t Reform, 111th Cong., House Hearing on Defense Base Act, supra note 14.348 This particular recommendation was supported by DoD in its report to Congress. Strangely, the recommendation was not formally offered for adoption, as DoD considered improvements to the efficiency of the DBA program to be outside the scope of their charter pursuant to Section 843 of the NDAA for 2009. DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 54.349 See H. Comm. on Oversight and Gov’t Reform, 111th Cong.House Hearing on Defense Base Act, supra note 14.
77
claimants, made four recommendations to the Committee: (1)
Increase funding and personnel in the Office of Administrative
Law Judges; (2) Allow contractors with PTSD to receive treatment
from the Veterans Administration (VA); (3) Require insurance
carriers to notify widows of their right to file claims on behalf
of their spouses; and (4) Give administrative law judges the
power to assess a 10%ten percent penalty for insurance carriers
filing frivolous defenses to contractor claims.350
All of Mr. Pitts’ recommendations would be valuable
additions to the claims process. However, his suggestion to have
the VA treat civilians with PTSD is simply unattainable due to
insurmountable political and administrative hurdles. The VA is
so overwhelmed with military veterans from the wars of the last
two decades351 that putting such a strain on the system could be
catastrophic. Nevertheless, Mr. Pitts’ premise is quite
perceptive. The cost of litigating PTSD can often surpass the
cost of providing treatment.352 The situation is ripe for a
reallocation of risk. If carriers cannot accept liability for
these claims, it is only reasonable for the Government to self-
insure.
Government self-insurance offers a number of benefits to DBA
stakeholders. First, the Government could ensure proper
350 Need citation (likely same as previous)Id.351 Need citation352 Need citation
78
processing of PTSD claims. Second, insurance carriers, who lack
critical data on contractor injuries related to PTSD would be
relieved of any liability for such claims. Third, lower premiums
could be negotiated in exchange for the reduction of carrier
risk. Lastly, business opportunities would abound, as carriers
would still play a role in the administration of these claims for
the Government. If insurance carriers cannot manage the risk
associated with mental health claims, then it is clear the risk
should be reallocated. Government self-insurance would safeguard
injured contractors from mistreatment and would save the
Government valuable resources by removing the transactions costs
associated with disputing liability.
A third and final component to address the problem of
carriers denying complex claims is an extension of the
14fourteen-day period in which insurance carriers are expected to
pay claims.353 Although the rule was intended to speed the
processing of claims, it has created an incentive for carriers to
do the exact opposite. The current industry practice is to deny
complex claims to buy time for carriers and employers to
investigate.354 The proposed time extension is a reasonable one,
provided it does not prevent claimants from paying medical bills,
rent, mortgage, and other monthly family obligations.
353 20 C.F.R. § 702.232 (2011).354See H. Comm. on Oversight and Gov’t Reform, 111th Cong.House Hearing on Defense Base Act, supra note 14.
79
In summary, while a multiple provider solution provides
greater control over the processing of DBA claims, a reallocation
of risk is crucial in order to protect the rights of contractor
veterans in complex claims cases. District directors must be
given the authority to issue binding decisions. Government self-
insurance for PTSD and TBI cases is essential if Congress is at
all interested in providing relief to claimants and their
families. Finally, due to the complexity of certain DBA claims,
the 14fourteen-day rule should be extended, when appropriate, to
give insurance carriers adequate time to investigate claims.
These changes should be paramount to the budget and fiscal
concerns that have dominated the acquisition strategy discussions
to date.
5. Outcomes Versus Costs
Government officials have been concerned about the costs
associated with the open-market strategy since the 1970’s,355 yet
DoD has resisted any deviation from the current open-market
system.356 Between 2003 and 2007, as DBA insurance costs were
escalating, USAAA audit reports found that the Army’s LOGCAP
contracts, which all secure DBA insurance on the open-market, had 355 See U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-05-280R, DEFENSE BASE ACT INSURANCE: REVIEW NEEDED OF COST AND IMPLEMENTATION ISSUES 4 (2005), available at http://www.gao.gov.new.items/d05280r.pdf.356 See, e.g., Memorandum from the Majority Staff, H. Comm. on Oversight and Gov’t Reform, supra note 334, at 10. But see, e.g., DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 7 (Indicating that DoD piloted a non-open-market program).Need citation
80
“substantial” underwriting gains and multiple DBA compliance
failures.357 In 2007, an analysis by the Congressional Budget
Office (CBO) concluded that the risk-pooling approach of the
single and multiple-provider systems could lower DoD’s DBA
insurance costs by as much as $362 million over a ten year
period.358 And finally, USACE reportedly experienced costs
savings in the first six months of the DoD-sponsored single-
provider pilot program of $19 million.359 Yet, in its 2009 report
to Congress, DoD ignored these findings and insisted that the
current strategy is the most inexpensive way to secure DBA
insurance.360
The bottom line is that no stakeholder has been able to
demonstrate with any certainty that one alternative would yield
greater cost savings than another alternative. Congress argues
the rising cost of DBA insurance has been a concern for the last
40 years.361 They rely on GAO reports and USAAA audit reports to
357 Valerie B. Grasso, Baird Webel, & Scott Szymendera, supra note 276, at 18, 20.358 Memorandum from the Majority Staff, H. Comm. on Oversight and Gov’t Reform, 110th Cong., to Members of the H. Comm. on Oversight and Gov’t Reform, 110th Cong., (May 15, 2008), available at http://abcnews.go.com/images/Blotter/DBA%20hearing%20_%2020080515102024.pdf.359 Id.360 Need citation (2009 report to congress)361 Need citation - No sources found to support the 40 years. The Congressional memo from footnote 334 only shows concern from 2006 on. A CRS on DBA had a legislative history that did not indicate concern until 2006.
81
support their conclusion that reform is needed.362 DoD relies on
data in its 2009 congressional report to tout the benefits of the
current open-market strategy.363 This difference in perspective
is precisely why the debate must focus more on system outcomes
rather than costs. Congress and DoD should be engaged in a cost-
benefit analysis rather than limiting the debate to conflicting
cost studies. The fact that there are so many uncertainties
regarding whether any particular system would result in savings
to the Government further bolsters the argument that outcomes
must be given greater weight in the decision-making process.
Many of the benefits of a multiple-provider system have been
discussed. Foremost on this list is the contractual remedies
that would be available if carriers continued to exploit injured
contractors. The Government has a moral and legal obligation to
protect its contractor veterans.364 It is unconscionable that
contractors have been treated as collateral damage. By
implementing a multiple-provider system, the Government could
more closely monitor insurance carriers to make certain claims
are processed appropriately. A multiple provider system would
also allow all contractors to compete on equal footing in the
acquisition arena. Rather than being denied DBA coverage and
362 See Memorandum from the Majority Staff, H. Comm. on Oversight and Gov’t Reform, supra note 334, at 9,12. Need citation (consider a see e.g. signal)363 Need citation (2009 report to congress)364 Pub. L. No. 85-477 Need citation
82
foreclosed from competition, every contractor, regardless of
size, would be able to obtain DBA insurance at comparable rates.
Thus, the system fulfills Congress’s requirement for maximizing
competition. Congress has long sought to change the way DBA
insurance is procured.365 However, the discussion should be
expanded to include a cost-benefit analysis in addition to the
current cost-saving discussion.
D. Maintaining the Status Quo
DoD recommends keeping the current open-market strategy but
makes four suggestions for improving the system.366 These
include: (1) making loss data accessible to all DBA carriers, (2)
creating contractor risk pools for contractors unable to obtain
DBA insurance, (3) requiring carriers to separate DBA insurance
pricing from other types of insurance, and (4) establishing a
single DoD contact for country-specific DBA insurance waivers.367
DoD considered the cost savings of a Government self-insurance
approach in its report to Congress, but dismissed the approach
because of the time required for implementation.368 While DoD’s
suggestions seem to be aimed at bringing more transparency to the
process, the impact of such changes would do little to resolve
the cost and claims processing problems under the current system.
365 Pub. L. No. 109-163 Need citation366 Need citation (likely same as next)367 Need citation (likely same as next)368 See DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 54.
83
DoD has used tThe open-market strategy has been used by DoD
since the advent of DBA insurance in 1941.369 Under this system,
contractors secure their own DBA insurance from a list of
approved carriers maintained by DOL.370 Contractors may also
self-insure if they have the financial means to do so and have
been approved by DOL.371 Proponents claim the free-market
approach is the best means available to control costs.372
Insurance carriers compete for DBA insurance business in the
open-market, which, in theory, allows contractors to obtain the
best possible premium rates.373
However, there are major drawbacks to an open-market
strategy. The Government does not maintain privity of contract
with insurance carriers, which leaves the Government with fewer
369 See, e.g., Memorandum from the Majority Staff, H. Comm. on Oversight and Gov’t Reform, supra note 334, at 4. Need citation370 See, e.g., DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 7. Need citation371 See id. at 7. A contractor may self-insure either by taking steps to financially prepare for losses on their own, or by establishing a legally licensed insurance company, known as a “captive insurer.” About 170 8 employers are listed by DOL as self-insured. See Division of Longshore and Harbor Workers' Compensation (DLHWC), U.S. DEP’T. OF LABOR , http://www.dol.gov/owcp/dlhwc/lscarrier.htm#authorized self-insured employers (last visited Jan. 12, 2012)(listing 8 employers as self-insured for DBA).See DEP’T OF LABOR , http://www.dol.gov/owcp/dlhwc/lscarrier.htm.372 See, e.g., DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 19. Need citation373 See, e.g., DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 3ion
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remedies when carriers stray from the Government’s objectives.374
DOL overseeas but is not responsible for processing DBA claims
and has little authority over insurance carriers.375 Injured
contractors disputing claims must await the final decision of
OWCP administrative law judges before obtaining relief, which can
take months or years.376 Further, the Government has no authority
over premiums negotiated between contractors and insurance
carriers even though the Government pays the costs.377 And, while
premium rates may be lower in some cases, the open-market system
has recently seen uncontrollable rises in cost, excessive profits
by carriers, and too many denials of PTSD claims.378 Due to these
concerns, the current strategy falls well -short of stakeholders’
moral and statutory obligation to contractor veterans, even with
the improvements suggested by DoD.
On the other hand, DoD’s recommendation to make loss data
accessible to all DBA carriers in a nation-wide database should
be implemented, as it would help carriers better understand DBA
risks and provide greater transparency in the acquisition
process. Such an improvement, however, does not resolve
Congress’s immediate cost and claims processing concerns. DoD
has increasingly relied on contractors since the beginning of the
374 See supra section xxxxx.375 See supra section xxxxx.376 See supra section xxxxx.377 See supra section xxxxx.378 See supra section xxxxx.
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Persian Gulf War in 1991.379 Three insurance carriers have
provided 97% percent of the DBA insurance to these contractors:
(1) AIG, (2) CNA, and (3) ACE Group.380 These carriers contend
that the early years of war in Iraq and Afghanistan were novel
situations and that premiums have declined because carriers now
have a better understanding of the risks of working in those
regions.381 While it is true that these three carriers have been
able to collect claims data for the last two decades, cost and
claims processing problems have not been reduced.382 USAAA audit
reports and GAO reports in the last five years have found rising
DBA costs and wild fluctuations in insurance rates.383 Thus,
sharing claims data will not resolve the current problems.
Perhaps it is the nature of war-time contracting that makes the
risk so unpredictable; each conflict depends greatly on
geographical, political, military, social, and economic factors.
A national DBA claims database is surely an improvement over
individual carriers tracking claims. However, data collected by
the major DBA insurers has not yet resulted in decreased costs of
DBA insurance.384
379 Need citation (same as next?)380 DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 28.381 See id. at 19.382 Need citation (likely same as next)383 See Valerie B. Grasso, Baird Webel, & Scott Szymendera, supra note 276, at 18.384 Need citation (likely same as previous)
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DoD also suggests creating contractor risk pools that would
require larger insurers to provide insurance to high-risk
contractors who cannot otherwise obtain insurance on their own.385
Thise improvement attempts to mirror a multiple-provider system
that uses risk pools to provide coverage to all contractors.
Under an open-market system, however, there is no way to
guarantee that riskier contractors will be offered fair-market
rates. Unlike a multiple-provider system, where government
agencies would negotiate rates for all contractors in the risk
pool, the Government could not control the premiums charged to
high-risk contractors. This recommendation would therefore not
result in the same type of leveling for high-risk contractors
that would result under a multiple-provider system.
DoD also suggests mandating that insurers do not bundle DBA
coverage with other insurance coverage and identifying a single
point of contract for the DBA waiver process.386 Neither
suggestion would correct current cost and claims processing
issues. Since the majority of insurers do not follow the
practice of bundling DBA insurance with other coverage, such as
accidental death or kidnap and ransom insurance, the
recommendation does little to bring resolution to current
385 See DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 55.386 Need citation (likely same as previous)
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acquisition problems.387 Further, a single DoD point of contact
for waivers would have little or no impact on the problems at
hand. Waivers affect a small number of contractors, as they are
only granted for foreign nationals and only if acceptable
workers’ compensation benefits are provided by applicable local
law.388 Thus, this recommendation would do little to solve
current cost and claims processing issues.
In summary, DoD’s recommendation to keep the status quo,
with the exception of four cosmetic changes to the system, is a
paltry attempt to assist injured contractors or to address
serious congressional concerns. Sharing claims loss data may
bring more transparency to the process. However, the data
collected by AIG, which provides 75 percent of DBA insurance
business, certainly has not helped that company lower premiums.
Risk pooling would resolve the problem of carriers refusing to
insure risky contractors, but the government has no way of
guaranteeing reasonable rates for those contractors. Waivers and
transparency in pricing would improve the acquisition system, but
again these improvements do not address Congress’s immediate
concerns. Thus, adopting DoD’s recommendation does almost
nothing to resolve cost and claims processing issues.
387 See id. at 56. DoD identified one insurer that bundled DBA insurance coverage with other insurance coverage.388 Defense Base Act, 42 U.S.C. § 1651(e) (2006).
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E. Government Self-Insurance: An Ideal Alternative
A multiple-provider system would provide many advantages to
both Government and private industry and can be implemented using
the existing statutory framework for DBA insurance. However, an
ideal alternative, and one that has shared at least moderate
support by Congress and industry389 is Government self-insurance.
Self-insurance offers perhaps the greatest system for
distribution of benefits to injured contractors, as well as the
highest potential for cost savings. One caveat is that this
option would require significant changes to existing DBA statutes
and would therefore take time to implement.390 Thus, Congress
should continue researching implementation of this alternative
and, if the data is supportive, begin taking steps to execute
transition.
Insurance companies are an essential component of risk
management. However, in the volatile business of DBA insurance,
carriers must often insure against risk with inadequate data and
under unpredictable circumstances.391 Given these conditions,
carriers charge higher premiums to cover a broader range of
potential liability, resulting in higher costs for the
389 DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 52; See also See H. Comm. on Oversight and Gov’t Reform, 110th Cong., supra note 145, at 98.390 See DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 54. DoD estimates it would take at least three years to implement government self-insurance.391 See supra section xxxxx.
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Government.392 In government contracting, agencies avoid this
situation by allocating risk to the Government.393 This way,
contractors are able to calculate their costs and submit offers
to the Government without having to adjust for unknown risk.394
Self-insurance achieves much the same goal. Self-insurance
shifts risk from insurance carriers, who have had trouble
calculating their risk in Iraq and Afghanistan, to the
Government.395 Private industry supports this system because
insurance carriers would be in the best position to offer third-
party administration of the system by capitalizing on their
unique infrastructure.396 Thus, because of the uncertainty of
risk involved in providing DBA insurance, self-insurance offers
an appropriate allocation of risk for the parties while
preserving business opportunities for private industry.
392 See supra section xxxxx.393 Need citation (possibly same as next)394 See Boardman, supra note 133, at 833.395 See DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 20.Need citation396 Private industry has shown support for third-party administration of a Government self-insurance system, and obviously favors the option over government-run insurance, whereby the Government would act as its own administrator. Still, some critics argue the system results in a net loss of private business. See DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 19. However, companies previously unable to absorb the liability would now be able to participate as administrators. Thus, the benefit of increasing industry participation is likely to offset any negative effect.
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Many of Congress’s claims processing concerns can be
alleviated through this shifting of risk. By employing a third-
party administrator who is not liable for the claims they
process, the Government removes any impartiality or business
incentive to deny claims. Fees for administrators would be
generated on a per-case basis irrespective of acceptance or
denial of liability and would likely reduce problems associated
with improper denial of claims. If the Government did encounter
problems with denial of claims, it could address the issue
directly with the administrator and realign processing with the
Government’s objectives. The administrator, under contract with
the Government, would be monitored using all the contractual
remedies provided to the Government under the FAR. Thus, even if
the administrator strayed from the Government’s objectives,
government oversight inherent in the government acquisition
system would allow for correction of any problems.
Another benefit to claimants and carriers alike would be the
elimination WHCA determinations. As mentioned above, carriers
often deny claims until an administrative law judge finds that an
employee’s injury resulted from a war-risk hazard.397 This
bifurcation of claims processing for war-risk hazards and non-397 See 20 C.F.R. § 61.101 (2011); See also OFFICE OF WORKERS’ COMPENSATION PROGRAMS, OWCP BULLETIN NO. 05-01, WAR HAZARD COMPENSATION ACT—CLAIMS FOR REIMBURSEMENT AND DETENTION BENEFIT PROCEDURES (2005), available at http://www.dol.gov/owcp/dfec/regs/compliance/DFECFolio/OWCPBulletin05-01.pdf.
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war-risk hazards claims has caused claimants immeasurable
hardship.398 Self-insurance would eliminate the bifurcation of
claims and lessen the needless suffering of contractor veterans.
One final benefit of self-insurance is that a greater
emphasis on contractor safety would be achieved. Acting as the
primary insurer for DBA benefits, the Government would be remiss
to not place considerable weight on contractor safety. As both a
past performance and an award fee evaluation factor, the
Government would likely put a high premium on contractors’ risk
management performance and safety records.399 Contractors would
surely pay more attention to safety if they expected COs to
closely scrutinize such data.
In addition to the benefits claimants would realize under
self-insurance, Congress, DoD, and private industry all agree
that the system has a high potential for cost savings.400 Under
this system, the Government pays workers’ compensation claims
much the same way it pays federal civilian employees’ claims.
Injured workers file claims with the Government, which then pays
claims without relying on a third-party insurer.401 Self-
insurance eliminates the role of insurance carriers as agents of
398 See DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 3.Need citation399 See DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 43.400 Id. at 19.Need citation401 5 U.S.C. § 8147(a) (2006).Need citation
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the Government, and thus avoids the excess monitoring and bonding
costs of single or multiple-provider systems.
Removing the “middle-man” offers notable benefits to
stakeholders. First, DBA premiums would be eliminated
completely. Contractors would no longer include DBA insurance as
a direct cost of their contracts. Second, the Government would
not pay administrative or other indirect fees that are typically
appended to insurance premiums. All fees other than those going
to the claimant and the third-party administrator would be
eliminated, including broker commissions, sales and marketing
costs, and profit.402 Thus, the difference between the cost to
compensate injured workers and the cost of actual losses would be
significantly less than under any other insurance system.
Further, since costs incurred would predominantly come from the
reimbursement of actual losses, the Government would not be
affected by financial markets or other financial factors
affecting the insurance industry. Overall, the Government would
retain greater control over the cost of DBA insurance under this
system.
Despite these benefits, there are a number of arguments
against Government self-insurance. The greatest of these
concerns is the time it would take to implement the system. The
threat of “bigger government” would unquestionably draw furious
402Id.
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debate from political and industry opponents. Concerns over
funding for Medicare, Medicaid, Social Security, and even the
Postal Service raise questions about Government management of
reimbursement programs. Time, however, should hardly be
considered an impediment. More discourse on the topic should be
encouraged, as such democratic discussions would only bring more
transparency to the process. Congress and DoD, eminently
concerned with costs, would benefit from public opinion on more
important matters such as coverage for contractors suffering from
PTSD and TBI. Moreover, as long as DoD adopted a multiple-
provider system during the interim period, there would be no harm
in waiting for Congress to pass legislation making the Government
more accountable for injured workers.
Other than time, opponents have struggled to articulate why
self-insurance would not be an ideal system. Critics have argued
that if contractors are no longer required to obtain their own
insurance, they are less likely to provide a safe workplace.403
Based on the discussion above, this argument is without merit.404
On the contrary, contractors would be much more safety-focused if
the Government was self-insuring, as contractor safety records
would receive greater scrutiny.405
403 See DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 19.Need citation404 See supra section xxxxx.405 See supra section xxxxx.
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Opponents also argue that because of the unknown risks
associated with DBA insurance, self-insurance might create Anti-
Deficiency Act issues.406 These concerns are warranted. However,
relying on DBA claims data from DOL, as well as data from the
recently implemented SPOT system, the Government will be able to
accurately estimate the cost of DBA claims.407 Additionally, the
Government has been in the business of insuring employees for
some time, and the system has never created Anti-Ddeficiency Act
problems. The Government maintains the Federal Employees’
Compensation Fund (FECA), which pays workers’ compensation claims
to federal civilian employees.408 The Secretary of Labor submits
annual estimates of appropriations necessary for the maintenance
of FECA to the OMB.409 Each government agency employing injured
civilians assists the Secretary in collecting claims data by
submitting the total cost of benefits paid from FECA during the
preceding year.410 Agencies then request funds equal to the
estimated cost of claims to be paid for the following year.411
Through this statutorily-mandated process, the Government has
406 DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 19.Need citation407 See Booz Allen Hamilton, Synchronized Predeployment & Operational Tracker Training Workbook for Government Organization Users, (Oct. 2009), available at https://spot.altess.army.mil/Resources/Government_Organization_Workbook.pdf.Need citation408 5 U.S.C. § 8147(a) (2006).Need citation (maybe same as next)409 5 U.S.C. 8147(a) (2006).Id.410 Id. § 8147(b).Need citation (possibly same as previous)411 Id.Need citation (possibly same as previous)
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avoided running afoul of the Anti-Deficiency Act.412 A very
similar process could be imposed and managed by a third-party
administrator. The administrator would collect claims data from
contractors and pass the information on to the Government. Such
a system is one of many that the Government could use to avoid
violating fiscal law.
Finally, critics argue that self-insurance goes against
Congress’s mandate for DoD to adopt an acquisition strategy that
promotes competition in the insurance marketplace.413 Quite the
contrary, Congress, DoD, and the insurance industry, including
some brokers,414 are interested in self-insurance because it
provides a unique business opportunity for insurance carriers.
DoD employs more than 718,000 civilian personnel.415 Managing the
claims of these employees would provide an incredible revenue
stream for any insurance carrier. Carriers already have the
infrastructure in place to perform claims processing for large
government agencies. And, without being required to accept the
risk of insuring contractors overseas, business would be
relatively consistent and predictable. The House Oversight and
Government Reform Committee noted that CNA experienced losses of
412 See Id. § 8147(a).Need citation413 DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 19.Need citation414 See DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 19.415 U.S. DEPARTMENT OF DEFENSE, http://www.defense.gov/about (last visited Jul. 12, 2011).
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about $15 million between 2002 and 2007 on contracts with DOS,
USAID, and USACE.416 By removing the underwriting risk and
capitalizing on the infrastructure and services that insurance
carriers can provide to the Government, carriers could develop a
very profitable industry. Congress’s requirement for competition
in the marketplace would certainly be met by awarding contracts
for these services through the government contract process.
Overall, the arguments against self-insurance do not carry
much weight. If, as stakeholders say, self-insurance is simply a
matter of time, then the Government should begin taking immediate
steps to move the proper legislation through Congress.
V. Conclusion: The Way Ahead
The benefits of Government self-insurance are universally
recognized by all DBA stakeholders.417 However, until Congress
has an opportunity to develop a strategy for implementation, a
multiple-provider acquisition strategy offers the best interim
solution. Transition to a multiple-provider system would not
require extensive statutory change and could be implemented in a
relatively short period of time. Procuring the services of 416 See Memorandum from the Majority Staff, H. Comm. on Oversight and Gov’t Reform, 110th Cong., to Members of the H. Comm. on Oversight and Gov’t Reform, 110th Cong., (May 15, 2008), available at http://abcnews.go.com/images/Blotter/DBA%20hearing%20_%2020080515102024.pdf.417 See DEP’T OF DEF., OFFICE OF THE DEPUTY UNDER SEC’Y OF DEF. ACQUISITION AND TECH., supra note 40, at 52; See also See H. Comm. on Oversight and Gov’t Reform, 110th Cong., supra note 145, at 98.
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multiple carriers to provide insurance to agencies or divisions
within DoD is already achievable.
Furthermore, a multiple-provider system would offer
several key benefits that would pave the way for Government self-
insurance. First, and most importantly, a multiple-provider
system would provide privity of contract with insurance carriers.
This contractual relationship would allow government agencies to
retain control over the claims process and would infuse much
needed accountability into the DBA insurance system.
Additionally, granting DOL district directors the authority to
issue binding decisions would eliminate the financial strain on
injured contractors and their families during the appeals
process. Self-insuring against the risk of PTSD and TBI would
save the Government and other stakeholders valuable resources
currently wasted on needless litigation. It would put the risk
of insuring against mental illness on the Government, and would
restore accountability to a system that has for the last decade
facilitated the profiteering of wounded Americans.
In summary, the way in which the United States fights wars
has changed over the last two decades. If the United States
wishes to continue its reliance on overseas contractors, then it
must recognize its moral obligation to the men and women
sacrificing their lives to support our Armed Forces. It is
shameful that contractors seeking treatment for mental illness
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due to roadside bombs and improvised explosive devices are turned
away by insurance carriers.
Sending civilians into war has consequences, but those
consequences should not be borne by the children and spouses of
our contractor veterans. After nearly 40 years, Congress has
finally mandated adoption of a new acquisition strategy. It is
breathtaking that DoD has suggested maintaining the same open-
market strategy that will continue to exploit wounded Americans
serving in Iraq and Afghanistan. While keeping the status quo
may be the simplest solution, it does not follow the age-old
military ethos that no American should ever be left behind.
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